What are the Compliance Risks in Banking & Financial Sector?

Narendra Sahoo is a director of VISTA InfoSec.



The Banking and Financial Sector is always a soft target for a cybercriminal, given the enormous amount of sensitive data that the industry deals with. For these reasons this sector always comes under the radar of various Compliance and Regulatory mandates. Due to the growing risks and sophistication of cybercrimes prevailing in the industry, compliance and regulatory mandates keep evolving rapidly.  This makes it difficult for banking and financial institutes to keep up with changing requirements and mandates.

Given the complexity of the business operations, these institutes struggle to develop, align and integrate their operations and risk management strategies with various compliance, and regulatory frameworks. Banks and Financial institutes need to proactively identify and manage not just the evolving cyber threats but also the compliance risks in the industry.

Banks and Financial Institutes are expected to keep pace with the evolving landscape and develop strategies for building effective solutions. This is to address the compliance risk in the growing diversity of the regulatory and compliance ecosystem. Covering more on this and explaining the compliance risks prevailing in the Banking and Financial sector, we have also shared some best practices for addressing such risks in the industry.

Regulatory & Compliance Requirements in Banking and Financial Industry

Regulatory Compliance has always been the top priority for financial institutions. For the sheer amount of sensitive and personal data that they deal with, they require a high level of cybersecurity. For these reasons, compliance has become an integral part of all the Banking and Financial Institutes’ security programs. Further, with the increasing threat exposure in the industry, compliance standards have been heightened dramatically over the years. This has resulted in an immense amount of pressure on banking and financial institutes that are subjected to international cybersecurity and compliance regulations.

Emerging from various national and international governing authorities, a lot of the regulatory and compliance standards are now a mandate for the industry.   Data Privacy and Data Security Standards and Regulations such as GDPR, CCPA, PCI DSS, MAS TRM, ISO27001 and RBI- Digital Payment Security Control are some of the popular and widely applicable Regulatory Compliance requirements for the Banking and Financial Industry. So, with the heightened regulatory requirements, it has now redefined the compliance and risk management process.

Today, compliance risk is a real concern for most Banking and Financial Institutes. Compliance Risk which involves non-adherence to industry regulations and standards results in organizations facing the consequences of violation including financial penalties. So, with this, the cyber risk and compliance risk go hand-in-hand, and institutes now need to appoint a compliance team, for hiring relevant compliance officers for the role. Getting into the details of it, let us today understand the various types of Compliance Risks faced by the Banking and Financial sector.

Understanding the Compliance Risk in the Industry

Compliance risk is technically a subset of an enterprise risk that relates to failure or non-compliance with regulatory and industry standards and facing consequences of it. Besides a sense of professional obligation, there are other reasons why organizations must put in their best effort to avoid falling prey to various Compliance risks. Broadly speaking compliance risks can be categorized into five common types that are listed and explained below-

  • Data Security & Data Privacy Risk

When we talk about data security and privacy risks, it implies the high-level risk of exposure to sensitive data of consumers. Non-compliance to industry standards and regulations such as PCI DSS(https://www.vistainfosec.com/service/pci-dss-audit-certification-service/), GDPR, CPRA, and ISO27001 does not just result in non-compliance but may also result in unforeseen events such as data breaches and hacking. This would further result in data loss, destruction, data exposure to the public, and/or even theft of sensitive data.

  • Legal Risk-

Legal Risk is the risk arising from non-compliance to standards and having to face the consequences of legal actions. By legal actions, we mean imprisonment, penalties, cancelation of business licenses, debarment of business operations, and product seizure to name a few.

  • Financial Risk-

Financial Risks are consequences of non-compliance that result in monetary loss. The non-compliant organization may have to face stringent financial penalties as well as loss in business in terms of the drop in sales, share prices, loss of investors, or any potential future earnings due to the reputational impact of non-compliance.

  • Reputational Risk-

Non-compliance to standards and regulations has a huge impact on an organization’s reputation. Customer’s perception of an organization changes especially when they find the organization is non-compliant and has a risk of facing a data breach. The risk of reputational loss also has a huge impact on business sales due to a lack of trust and confidence among consumers in the business.

  • Business Risk-

Non-compliance can have a huge impact on business and also result in the shutdown of the business.  Based on the severity of non-compliance and its impact in terms of data breach and the magnitude of sensitive data exposure, the business may likely end up losing its license to operate and resulting in a complete shutdown.

Best Practices for Compliance Risk Management

Managing compliance risk isn’t easy especially when there are multiple third-party vendors involved in the process. Ensuring Compliance can be challenging provided there is a systematic Compliance Risk Management process in place. That apart, here are some best practices that you can consider to address the compliance risk.

  • Active Involvement of the Board & Management

Active participation and involvement of the Board and Senior Management are essential for the success of any compliance program. They must make every effort to ensure they are aware and involved in all the compliance initiatives. This is to build a strong strong due diligence process for compliance risk management.

  • Develop Effective Third-party Policies & Procedures – Most businesses today depend on third-party vendors for certain services. So, businesses need to develop appropriate third-party policies and procedures in alignment with compliance requirements. This will not just ensure compliance but also make the vendors accountable for their services offered. Establishing a certain level of due diligence will help integrate and streamline compliance processes effectively.
  • Compliance Risk Assessment

For any organization to stay ahead of their compliance risk game, they need to conduct a regular assessment to identify the potential risks. Knowing what the risks are and the source of risk is crucial in the risk mitigation and risk management process. So, conducting a Compliance Risk Assessment regularly is essential. This will help organizations keep track of their current compliance posture and also help them evolve with the dynamic compliance landscape. So, organizations must consider establishing a process for conducting a regular compliance risk assessment.

  • Testing & Managing Compliance Risk

Managing compliance risks is impossible if you do not test the established security and compliance program. Moreover, the organization will not know the potential compliance risks unless its effectiveness is put to test. In short, a compliance risk management program becomes useless if it does not identify and address the right risks. For these reasons, regularly testing and managing identified risks is crucial to prevent the compliance risk and consequences of compliance failure.

  • Constant Monitoring, & Reporting

Managing compliance is a continuous process, especially in a constantly changing financial environment. Moreover, since compliance is itself a very dynamic landscape, organizations require constant monitoring of their compliance risk. Organizations need to ensure that they re-evaluate all the policies and procedures to ensure it covers all the risk factors that pose a threat to an organization. Further, they must ensure their Compliance Risk Management program is updated, relevant, and in alignment with the current security and threat landscape. This is to evaluate and regularly update their compliance efforts with the current regulatory and compliance requirements. This is an essential, ongoing process to avoid the complexity and consequences of potential compliance risk.


Managing Compliance Risks can be a daunting task given the complexity of the compliance requirements and operating procedures. However, a good start to managing Compliance Risk is by implementing measures to identify, monitor, and control potential compliance risks. This can be done by setting an automated and systematic approach to assessing, managing, and preventing Compliance Risk. Preventing the dire consequences of compliance risk requires establishing appropriate processes and also taking necessary measures to implement those processes. Further, regardless of the technique adopted, the organization must know why compliance risk and its management are essential for the organization. The team including the Board and Management needs to be aware of the potential Compliance Risk that they are exposed to, and establish policies, procedures, and appropriate processes to manage and prevent the consequences of such risk.

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