For any financial institution, maintaining compliance when performing any type of business activity is vital. Compliance is the rules and regulations that are set up by governments that financial institutions must pertain to while operating. Compliance outsourcing is one service that companies often avail of, because compliance laws are often subject to change due to several reasons. Some of the factors causing compliance changes or modifications are cyber threats, anti-money laundering, and the sector’s rapid expansion, to name a few.
Dealing with the ever-growing and changing list of compliance that financial institutions must adhere to, institutions often opt for the route of compliance outsourcing. Compliance outsourcing gives institutions access to experts who follow the most up-to-date and thorough industry practices.
Not to mention, the cost of hiring, training, and maintaining a compliance team can be costly and time-consuming. There are certain pitfalls to compliance outsourcing that financial institutions must be cautious of. The accountability of compliance breaches is borne by the financial institution, not the outsourced company.
This article takes a close look at some of the advantages and disadvantages faced by financial institutions when employing compliance outsourcing.
Advantages of Compliance Outsourcing
As mentioned, there are several benefits a financial institution can avail of by outsourcing its compliance needs.
- Compliance outsourcing allows a company to be up-to-date with compliance. Since several reasons lead to shifts in compliance requirements, it is useful to employ companies that are required to keep abreast of the best industry practices. Hiring experts who possess a depth of experience can help companies predict, plan, and prepare for anticipated compliance changes in the future.
- Financial institutions can focus less on compliance and more on core operational activities such as money supply regulation, banking services, pension fund services, capital formation, or the economic growth of a nation. Since financial institutions have a broad range of services that reaches many people, being able to focus on core operations is important.
- Financial institutions can focus on customer satisfaction and needs, and spend more time interacting with their customer base. Attracting and retaining businesses and customers is important for financial institutions, and compliance outsourcing allows a company to spend more time growing its client base.
- Compliance outsourcing facilitates the handling of financial audits such as loan reviews, investments in equity and debt securities, foreclosed assets, and income tax provisions. Financial institutions can gain access to experts at lower costs to manage this vital activity.
Disadvantages of Compliance Outsourcing
Here are some of the pitfalls financial institutions should be aware of when utilizing the services of compliance outsourcing:
- Liability is an issue that financial institutions will have to be aware of. If a company outsources its compliance needs to an inadequate service provider, then the company can potentially run into compliance issues in the future. The liabilities borne by compliance breaches will lie at the feet of the financial institution, not the company to which it has been outsourced. For this reason, financial institutes should be cautious when choosing the company to outsource their compliance. They must ensure that the chosen company has adequate skills, experience, and manpower to handle its needs.
- Financial institutions need to ensure that effective and efficient channels of communication are maintained with the outsourcing company. Constant communication is key if a financial institution wants to correctly utilize an outsourcing company to support its activities. The slightest disconnect or miscommunication can be quite costly and in extreme cases, completely derail a financial institution’s short-term equilibrium.
- Some experts have observed that some businesses tend to terminate their outsourcing contracts after two years. In such instances, companies would have been better off developing an internal compliance system from the start. Even financial institutions should carefully access their wants and needs and seriously consider all options before jumping on the compliance outsourcing bandwagon. A factor to consider is whether financial institutions wish to jeopardize client relationships by making them subject to potential third-party liabilities.
- Finally, newer or smaller financial institutions can suffer from structural issues by employing compliance outsourcing too quickly. Some experts believe it is beneficial for these companies to first develop an internal structure of some measure for smoother operations and decision-making in the future.
Compliance management is an important component that financial institutions take seriously. By outsourcing their compliance needs, financial companies can avail of high-quality services at lower costs. It allows financial institutions to focus on core operations and improve customer relations.
On the other hand, compliance outsourcing can also be disadvantageous to financial institutions. Any oversights committed by an outsourcing company will result in liabilities being borne by the financial institutions.
Financial institutions should carefully assess the company that best suits their needs. Companies should be wary of jumping on the compliance outsourcing bandwagon, especially if they are newly formed. Having some measure of internal compliance can assist financial institutions work in tandem with compliance outsourcing companies.