A compliance management system (CMS) is an integrated system used to meet regulatory requirements, internal policies and industry standards. An effective CMS helps organizations avoid areas of non-compliance and achieve ongoing regulatory compliance.
As its name suggests, a compliance management system is just that—a system. It doesn't consist of any one particular piece of technology or process, but rather a collection of tools, business processes and internal controls that work together to reduce compliance risk and help organizations meet their compliance responsibilities. A compliance management system can include anything from risk assessments to compliance training.
Having an effective compliance management system is essential to an organization's compliance efforts and broader risk management strategy. This necessity is because non-compliance with compliance requirements can result in severe consequences, including fines, business disruptions and increased risk of data breaches.
Today, compliance management systems often work with a high degree of automation and proactively identify potential risks, allowing organizations to take immediate corrective action and address compliance issues in real-time.
Compliance management and compliance management systems are closely related, though technically separate.
Compliance management refers to the broader strategy that an organization employs to adhere to regulations. However, a compliance management system (CMS) is the practical set of tools and controls used to automate and streamline these compliance processes. In other words, compliance management is the overall approach, while a CMS is the practical solution.
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Today, organizations face a growing number of compliance regulations across industries and jurisdictions. These compliance regulations are often complex and industry-specific, like HIPAA, for the healthcare industry, or regionally specific, like GDPR, for the European Union.
Failure to comply with these legal requirements can often bring heavy fines and legal troubles. For instance, in May 2023, Ireland's data protection authority imposed a fine of USD 1.3 billion on the California-based Meta for GDPR violations.
Additionally, consumer attitudes toward compliance issues and cybersecurity are shifting. In a recent McKinsey study, 85 percent of respondents said it was important to know a company's data privacy policy before making a purchase. Businesses are starting to see that compliance isn't just the price to pay for doing business; it might even be good for business.
Still, meeting compliance regulations can be challenging. Many organizations are increasingly global and have multiple offices worldwide with employees and customers across several regions, all with different regulatory requirements. These organizations might find it difficult to stay ahead of compliance requirements, especially as laws and regulations continue to change with the advent of new technologies. Organizations also risk introducing additional layers of compliance complexity every time they add a new business initiative or data-handling method.
A compliance management system (CMS) helps organizations face this complex regulatory landscape and remain compliant. It makes it easier to automatically check for areas of non-compliance in near real-time and respond to shifting regulations and legal requirements.
An effective CMS also lets organizations standardize their compliance efforts across regions and customize their approach to remain compliant with industry-specific regulations and standards. More broadly, a CMS also helps enforce ethical standards and establish a culture of compliance and corporate accountability.
While an effective CMS can include many elements, it generally centers on these three components:
The board of directors focuses on creating a culture of compliance from the top down. Given their many other responsibilities, they may not want to prioritize compliance; however, they are ultimately responsible for developing and administering a compliance management program.
Once they create an effective CMS, they should then communicate the policies to the senior management and all other stakeholders at the firm and beyond, including contractors and third-party service providers.
Only with board oversight can organizations show that they're taking compliance efforts seriously and create uniform policies that allow everyone in the organization to meet federal consumer protection laws and regulations.
Senior management may also want to appoint a chief compliance officer or manager to lead the compliance function and ensure effective management oversight. These leaders usually report directly and continuously to the Board to keep them informed about compliance issues, allowing them to make strategic and tactical adjustments to the compliance management program as needed.
Some responsibilities of compliance officers might include:
Establishing and implementing compliance policies and procedures
Guaranteeing that both management and staff undergo thorough employee training on consumer protection laws and regulations
Evaluating emerging compliance issues and new potential risks
Addressing consumer complaints through a standardized and well-documented consumer complaint response process
Communicating compliance activities and compliance audit findings to the Board
Taking necessary steps to implement corrective actions and continuously update the compliance program
The compliance program is the heart of a compliance management system. It serves as the central hub for designing and implementing all compliance controls and countermeasures. Typically, these programs include structured policies, procedures and practices, including internal controls and compliance processes, enforced by senior management.
A well-designed compliance program can include risk assessments, employee training, reporting mechanisms, corrective actions as well as compliance audits and compliance monitoring.
Employees should refer to the compliance program as their official compliance guide. That way, everyone operates from the same set of standards and consistently and accurately meets their compliance responsibilities. For this reason, it’s also essential to create a structured compliance training program so employees know their responsibilities and can align with current compliance guidelines and internal policies.
Organizations should also consider establishing consistent and transparent reporting structures. This increases efficiency and communication and allows compliance teams to assign tasks to appropriate staff members with clear workflows that track requests and corrective actions.
Consumer complaints can help organizations identify potential regulatory compliance issues. Frequently, customers are the first to spot potential risks, and responding to these complaints quickly can inspire customer loyalty while helping organizations take quick corrective action to avoid regulatory penalties. Additionally, regulatory authorities often scrutinize how organizations handle consumer complaints, so responding quickly and effectively can help improve an organization's compliance and regulatory standing.
Compliance audits are another essential component of any compliance management system. Whether internal or external, these audits involve an impartial assessment of an organization's compliance and adherence to internal policies, procedures and regulatory requirements. They are crucial in maintaining ongoing compliance and identifying potential compliance risks.
For external audits, unbiased external auditors generally provide an independent review of compliance policies and protocols. In contrast, an organization's internal audit department will typically perform an internal audit. Both types of audits are unbiased and should conclude with audit reports that outline findings and suggestions for improvement.
Because of their independence, compliance audits can provide organizations, especially larger ones, with additional compliance rigor and more checks and balances. They can also serve as a historical record for compliance activities and can even be shared with regulatory authorities to demonstrate accountability during a regulatory audit.
While compliance audits may be stressful, organizations can help streamline the process by being well versed in relevant standards and maintaining organized records to help auditors quickly locate the necessary information.
In between compliance audits, organizations can perform risk assessments and ongoing compliance monitoring.
Compliance monitoring involves actively surveilling operations to identify areas of non-compliance. It helps organizations adhere to regulatory requirements and protect consumer interests in real time. When potential risks arise, compliance monitoring helps detect them earlier, then performs swift corrective action and remediation to prevent recurrence.
Other compliance monitoring methods include employee interviews, reviewing policies and procedures, assessing training effectiveness and comparing real practices with external disclosures. These measures can help organizations monitor compliance efforts in real-time and amend their compliance management system as needed.
To implement an effective compliance management system (CMS), organizations should consider taking a strategic approach that begins with understanding their business needs and continues through deployment and ongoing support.
Common steps to consider include:
Before adopting a CMS, understand your compliance and risk management goals to guide your CMS selection and setup. For instance, if you are a financial institution, identify whether adherence to particular regulatory frameworks, like ISO or SOX, is necessary. And then choose compliance management tools that include industry-specific tools and GRC (governance, risk and compliance) software.
After identifying your needs, customize your CMS. This customization may include adjusting the system to fit your organizational structure or business processes, assigning roles for users, or integrating it seamlessly with existing workflows and compliance tools.
As mentioned, an effective CMS requires buy-in from the board of directors and senior management. Engage these stakeholders early in the process and make their responsibilities clear. If leaders aren't involved—or don't understand their roles—it may be difficult to create a culture of compliance and create mistakes during deployment.
Remember, compliance is an ongoing process involving the entire organization. Conduct thorough employee training sessions to show employees how to navigate the CMS with confidence. Consider also reminding employees of the "why" behind compliance efforts and sharing the risks and repercussions of non-compliance.
To further emphasize the importance of compliance, establish clear lines of accountability. During every stage of the compliance program's lifecycle, make employee expectations clear, then actively enforce disciplinary protocols.
Maintaining an effective CMS is an ongoing process. Prioritize continual compliance monitoring and refinement to keep the system relevant to your organization's compliance needs.
Streamline policy, audit and report sharing for automated compliance.
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