Compliance and risk management: what are the differences?

While compliance and risk management are related concepts, there are some key ways to differentiate between them. Risk management and compliance are typically part of a business’s governance, risk management and compliance practices, known as GRC. They are grouped together in this way to demonstrate the interconnectedness of these concepts. In the next sections, we will explore what compliance is, what risk management is and how the two align.

What is compliance?

Put simply, compliance means adhering to the rules and regulations that companies have to meet in order to avoid legal consequences. What it takes to be compliant can change over time and businesses often have to work to comply with new regulations as they emerge.

Indeed’s guide to HR compliance explains that it is the business’s responsibility to be aware of any changes to the law. Some of the ways that HR teams can help to navigate the complexities of compliance include:

• Defining and communicating HR policies
• Automating processes wherever possible to reduce human error
• Reviewing policies and procedures regularly
• Thoroughly mapping employee lifecycles including onboarding, offboarding and payroll systems

Businesses may also want to look at using compliance management systems in order to help comply with government regulations. These systems usually have controls to mitigate risks. Often businesses update their compliance management systems in order to remain compliant with changing regulations.

What is risk management?

Risk management is the way that businesses can assess threats or issues that they may face in the future. These issues can be:

• Legal
• Financial
• Strategic
• Or security

There are several different ways that businesses can manage risk. These include:

• Risk avoidance: This involves the elimination of all hazards.
• Risk sharing: A tactic which involves transferring the impacts of financial losses to third parties.
• Risk reduction: The systems that businesses have to mitigate risks, usually where they cannot be eliminated completely.
• Transferring risk: A tactic that involves transferring the burden of risk from one party to another.
• Risk acceptance and retention: A process that involves deciding that potential risk is financially not worth the cost of mitigating it and accepting the consequences if that risk emerges.

How risk management helps businesses to be compliant

There is a crossover where businesses are required by law to mitigate certain risks. This is so that businesses can show that they are protecting their customers and are not using their business to conduct any illegal activities.

Often risk management helps businesses to stay compliant with government regulations, such as anti-money laundering (AML) and the General Data Protection Regulations (GDPR) and the Data Protection Act 2018. This means that businesses have to manage certain types of risk to stay compliant with UK law. In this next section, we will look at some further examples of these.

Financial

Financial institutions that operate in the UK have to stay compliant with anti-money laundering (AML) regulations. According to the UK government, businesses in the financial sector have to register with a supervisory authority in order to follow anti-money laundering regulations.

Businesses should also practise customer due diligence, which means identifying customers, checking they are who they say they are. The UK government also states that financial businesses should have adequate internal controls and ongoing monitoring. For more information, please visit the UK government website. 

Security

Cybersecurity is a growing concern for businesses, especially as they have a duty to protect the data of their employees, customers and clients. This is governed by data protection regulations such as the GDPR and the Data Protection Act 2018. 

They set out frameworks which show businesses how to securely manage personal data and records. For more information, please follow the UK government links provided.

According to Indeed’s guide to cybersecurity skills gaps, the average cost of a data breach is £1,200, not including the costs of recovering from the breach or mitigating the risk of the attack. Therefore, learning how to mitigate these risks by training staff in secure data management may be strongly beneficial. 

Who is responsible for risk management?

Businesses may have teams in place in order to help manage risks and stay compliant. These can include:

• Risk analysts: These analysts identify and assess potential financial risks, plus provide advice on how to do so.
• Compliance officers: These officers are knowledgeable about compliance regulations and can provide businesses with advice on the subject. They are also often responsible for designing compliance training programmes.
• Credit analysts: These analysts look at whether individuals or businesses are eligible for loans and can keep financial obligations. They also manage credit risk.
• Operational risk managers: Focusing on a business’s internal systems and people systems, operational risk managers identify, assess and mitigate risks associated with these areas.
• Chief risk officers (CRO): Govern the company’s risk management approach, ensuring that it is correctly meeting compliance regulations and that risk mitigation strategies are working effectively.

It may also be necessary to train staff in basic risk management, such as proper use and storage of personal data. Usually, compliance officers will provide compliance training for business employees.

There are some key differences between risk management and compliance. Risk management can help businesses remain compliant with UK government regulations, especially those relating to security and financial risks. Businesses can also benefit from employing the expertise of trained risk management professionals such as CROs, risk analysts, credit analysts and more. At the end of the day, risk management can help promote the longevity and health of a business. Compliance, on the other hand, is integral to not running foul of the law and receiving penalties.