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LegalTech: Bridging the Gap Between Compliance and Operational Risks in Financial Services

May 19, 2022

Trust and Transparency are two key principles that drive the enterprises in the financial sector and therefore, financial services companies must work with strong governance fundamentals when it comes to the delivery of services. Compliance is the bedrock of all that propels growth in the financial services domain.

Let’s understand this with an example.

Very recently, SEBI has announced three regulations with the intent of making mutual fund investments safer. Though it means a disruption in the operational workflow of investment companies, for investors it means all possible guarantees for a safer investment, and these are:

  • The three dividend options namely the dividend reinvestment, dividend, and the growth need to be appropriately renamed along the lines of Income Distribution cum Capital Withdrawal or IDCW to prevent the mutual fund companies from re-investing it.
  • The existing risk meter has been completely revamped to include all possible risks an investor is exposed to when it comes to bonds. Furthermore, as per the SEBI directive, this meter has to be updated monthly and tagged along with the fund’s portfolio.
  • Inter-scheme transfers will be regulated to ensure that the transfer of securities from one scheme to the other is allowed only when they happen at the present market price for the quoted instruments.

While this regulatory micro-managing can be annoying to the mutual funds’ companies, the investor engagement resulting from the same is extremely encouraging.

As per the SEBI Bulletin March 2022 issue, the total assets under the Mutual Funds management have skyrocketed from Rs 22.3 lakh crore as of March 31, 2020, to Rs 38 lakh crore on January 31, 2022.

From the above, it is crystal clear that in financial services, the intent to strengthen the trust factor drives the regulatory bodies and the companies to reimagine and innovate their operational policies to mitigate unwarranted risks and remain compliant. This in turn becomes the cause for growth.

Before we delve deep into how tech bridges the gap between operational risk mitigation and compliance, let’s first understand what operational risks stand for in Financial Services.

Operational Risks in Financial Services

Operational risks in the financial services domain are mostly around reputational and financial loss stemming from failed processes, system disruption and employee behavior, and non-compliance. The drive for digitization and the emergence of complex value-chains has exposed the financial sector to external factors and laid bare the gaps in the existing processes around people and systems. Let’s deep dive and understand each of these operational risks.

  • Systems risks- This is about the prevalent inadequacies in existing internal systems from the standpoint of information management, connectivity between the branches, and integration of all the systems operating in silos.
  • People risks- This is about the inability to imbibe a culture of compliance within the organization resulting in unethical behavior and human errors.
  • Process risks-This are about inadequacies in the policy frameworks that bring people and systems together.
  • External risks- This is about external events that disrupt the workflow. For example- The pandemic can be hailed as an example for it completely pushed financial services towards 100 percent digitization while exposing them to unwarranted elements.

Let’s understand operational risk better through the case study of Yes Bank.

The Context

In January 2020, the resignation of one of the independent board members of the Yes Bank on the grounds of governance issues sparked investigations by RBI. On 8th March 2020, the then Managing Director was arrested under the provisions of the Prevention of Money Laundering Act. As per the Enforcement Directorate, the bank’s non-performing assets amount to a staggering US$2.6 billion and there were innumerable shell companies floated by the family members of the Managing Director. A detailed probe revealed that the management had ignored all the risk warnings to extend credit facilities to various corporations in exchange for monetary gains.

What Went Wrong

In 2015, UBS (a global financial services company) raised alarms over the bank’s asset quality which was ignored by Yes Bank, and it continued to lend without any strict due diligence. So, this was a clear case of people risk bordering on negligence and a lack of compliance culture within the organization. So, from the above case study, you can easily comprehend how the lack of effective and intuitive compliance automation can be a cause of human errors and non-compliance leading to reputational and financial losses.

The Consequence

While the probe against individuals is still on, the Yes Bank was bailed out by the SBI-led consortium with a 48.21 percent stake acquired by the state-specific State Bank of India under the RBI’s reconstruction scheme.

Solution: Technology Bridging the Gap Between Operational Risks and Compliance

Compliance automation is the key to driving an efficient GRC strategy across the financial organization and the key to achieving this automation. A GRC automation tool would deliver the following benefits.

  • Improved efficiency with proactive identification, tracking, and resolution of issues
  • Single-window visibility for risk management, compliance, and corporate governance
  • Improved scalability with superior access controls for many users across multiple locations
  • Increased adaptability to existing systems and zero disruption to ongoing workflow

If you are an enterprise operating in the domain of financial services, write to to know how a powerful compliance management tool can transform your business operations.

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