Financial compliance refers to the adherence to laws, regulations, and standards set by governing bodies and regulatory authorities within the financial industry. As per Scott Tominaga, financial compliance must not be considered to be just a box-ticking exercise, as it is incredibly vital for businesses to maintain their reputation and trustworthiness. After all, it is natural for people and businesses to engage with regulated, ethical businesses that work within the law.
Scott Tominaga underlines the importance of financial compliance
Financial compliance involves the regulation and enforcement of the laws and rules in the financial and capital markets. It may range through the whole financial spectrum, right from retail banking practices to investment banking practices. Financial compliance particularly became a serious issue for regulators and other concerned parties in the aftermath of the 2008 Global Financial Crisis. Adequate financial compliance in 2008 might have saved the pensions, houses and retirement funds of many, and lowered to overall magnitude of the recession. Proper financial compliance is also vital to maintaining the trust of the public in capital markets and the banking system.
Rules and laws for financial compliance have varied origins. They typically cover matters associated with adhering to proper standards of conduct for business, as well as in the financial markets. Such regulations go a long way in managing conflict of interest, enabling accurate and timely tax payments, facilitating fair treatment of customers and other stakeholders, ensuring the delivery of quality services and so on. The scope of such functions is pretty expansive, and regulators typically aim at preventing serious threats like money laundering, terrorist financing, and other criminal offences.
There are many reasons why financial compliance is vital for businesses, including:
- Legal requirements: Compliance makes sure that every activity in a company is legal, as the requirements outlined by financial laws, regulations and reporting standards are effectively met. Any failure to comply with these rules may lead to fines, penalties and even legal consequences. It may also hamper the overall reputation of a company.
- Trust and transparency: Financial compliance helps in fostering transparency and trust among discerning stakeholders, including shareholders, investors, customers and the public at large. It shows the commitment of a company towards ethical and responsible financial practices.
- Efficient financial management: Financial compliance is instrumental in establishing robust financial management practices, including timely reporting, effective internal controls and accurate record-keeping. Such practices support balanced decision-making and risk management, while promoting financial stability.
- Investor confidence: Compliance with financial regulations goes a long way in boosting investor confidence. Investors tend to be in search of accurate and transparent financial information to make informed investment decisions, which paves for additional investment opportunities. Non-compliance, on the other hand, may not only discourage potential investors but also erode the trust of existing investors.
- Risk mitigation: Compliance can be helpful in identifying and mitigating financial risks. Implementation of proper controls can go a long way in lowering the risk of fraud, errors, and financial mismanagement.
As Scott Tominaga mentions, financial compliance guidelines may come from distinctive sources, including the primary legislation, statutory regulations, and standards issued by local and international bodies. For instance, in the United States, the Federal Reserve ensures compliance with monetary policy.