Staying ahead with Regulatory Compliance Risk Management

Payal Wadhwa

Payal Wadhwa

Jul 23, 2024

Regulatory Compliance Risks

Recently, the European Commission informed Apple that its App store policies hinder competition by restricting app developers from directing people to other channels. This was deemed a breach of the Digital Markets Act (DMA) and could lead to a penalty of 10% of Apple’s global annual revenue along with further investigations. The DMA is a recent regulation that came into effect fully in May 2023. Therefore, the company is facing a regulatory risk and must act immediately to navigate through it.

KPMG calls 2024, the year of regulatory anxiety, with organizations considering economic volatility, uncertainties around elections, and legal consequences a real challenge. They predict that regulatory parameters could expand or become increasingly complex and advise businesses to buckle up to minimize risk and compliance shocks.

This blog will help you understand regulatory risks and how to manage them without sacrificing focus on mission-critical tasks.

TL,DR:
Regulatory risks arise due to changes or updates in regulations while compliance risks occur due to internal failures
The different types of regulatory risks include financial, data privacy, health and safety, and industry-specific risks.
Some regulatory risk management frameworks include COSO, NIST RMF, ISO 31000, Basel III, and COBIT.

What is regulatory compliance risk?

Regulatory compliance risk refers to the potential of an organization to incur repercussions due to changing laws or updated regulations. These repercussions include fines and legal penalties, operational disruptions, and an impact on the organization’s reputation.

What is regulatory compliance risk management?

Regulatory compliance risk management refers to the process of minimizing risks and ensuring adherence to the applicable industry standards by updating internal controls and policies to align with regulatory requirements. It is a proactive approach that involves navigating regulatory compliance, enabling long-term sustainability, and minimizing financial stress.

Effective regulatory compliance risk management entails close monitoring of regulatory changes and implementing proactive strategies to stay ahead of the curve.

Types of regulatory compliance risk

Here are some common types of regulatory compliance risks that organizations usually face:

Financial

Financial risks arise from updates or amendments in financial regulations that can impact how companies oversee their financial operations or report performance. For example, changes in SEC regulations can impact how companies disclose financial information. Similarly, changes in tax laws can affect how businesses manage tax deductions and reporting.

Data Privacy

Data privacy risks occur when there are changes to or introduction of new data protection and privacy laws. For example, non-compliance with EU data regulations (GDPR), or with California state laws (CCPA) can lead to data breaches.

Health and safety

Health and safety risks are attributed to changes in healthcare compliance standards or occupational safety standards. For example, any amendments to how patient data must be handled, any updates in laws that require organizations to improve workplace safety protocols etc.

Industry-specific

These risks occur due to changes in industry-specific laws. For example, businesses not being able to transit to PCI DSS 4.0 after the release of the new version.

Minimize regulatory compliance risks with Sprinto

Regulatory risk vs compliance risk

The terms regulatory risks and compliance risks are often used synonymously but there is a significant difference between the two. The former arises from changes and updates in laws while the latter is due to failure to adhere to existing standards.

Let’s understand in detail:

Compliance risks result from failure to meet internal policies or not complying with industry-specific compliance obligations. They are oriented internally and can be managed when internal controls are implemented, training and monitoring are pursued, and rules are constantly followed.

An example of compliance risk can be a hospital failing to comply with HIPAA regulations, leading to unauthorized access to information and attracting monetary penalties

Regulatory risks, on the other hand, arise when changes or updates occur in the regulatory environment. These are mostly due to external factors and can be addressed by staying informed about upcoming changes and having adaptive strategies.

An example of regulatory risk is the introduction of a new healthcare law that requires hospitals to make new investments to protect patient records.

How to overcome the challenges of regulatory compliance risk management?

Rising data security concerns, technological advancements, and cross-border business expansion have increased the complexity of regulatory environments and made it hard to navigate the intricacies.

Let’s look at some of the challenges of regulatory compliance risk management and ways to navigate them:

1. Evolving regulations and complexity

As organizations today look to expand their business beyond borders, they are subject to a wide array of regulations. To add to these complexities, new regulations and updates are being released. It becomes difficult for organizations to interpret these detailed and technical requirements across multiple frameworks.

According to the Coalfire Compliance Report 2023, 59% of security leaders say that their organizations have multiple systems that must adhere to compliance requirements. Compliance is also essential to do business in their industry.

How to solve it?

  • Have a comprehensive compliance program that is flexible and adaptable to make sure that the policies are frequently updated to accommodate changes
  • Stay connected with peers and industry experts to remain informed about the compliance landscape
  • Seek external expertise in the form of technology and automation tools or consultants

2. Cultural barriers

It is common for organizations to face resistance from employees when the idea of becoming compliant is first introduced. There is a lack of understanding, and employees fear a disruption to their routines.

Another cultural barrier can be a lack of support from leadership and upper management. When leaders don’t engage with the stakeholders and demonstrate commitment, they may be met with resistance.

How to solve it?

  • Enhance training and awareness to enable employees to understand the value of compliance
  • Use tools that minimize the need for manual work and enable employees to focus on critical tasks
  • Seek senior management buy-in and promote a culture of compliance

3. Vendor risks

With a greater dependency on third-party service providers, organizations are also responsible for ensuring that vendors are secure and compliant. This can be tricky and time-consuming, especially when organizations work with multiple vendors.

The information service sector is said to have 25 vendor relationships on average while healthcare has about 15.5. One can only imagine the level of monitoring required here.

How to solve it?

  • Conduct thorough vendor due diligence and assessments before onboarding the vendors
  • Establish clear terms of contract to create accountability and responsibility
  • Leverage vendor management systems and ensure continuous monitoring

4. Budgetary constraints

Compliance can be costly, especially if you take the DIY approach or hire a consultant. 58% of security leaders said that the internal costs of compliance have been increasing over the last 3 years.

It becomes difficult for CISOs to get the security budgets approved especially if the top leadership is not aligned on the importance of compliance. Small businesses already have limited resources, which makes it difficult for them to keep up with regulatory changes.

How to solve it?

  • Small businesses can leverage compliance automation tools to ensure that the budgets are not exceeded.
  • Large businesses should evaluate the ROI of tools that they have already purchased. Also here’s a nugget that was unearthed from a webinar we conducted earlier: 

“When there is a budget or a headcount pushback from the top management, Don’t go to the board and use ‘fear’ to get the budgets approved but rather use the ‘business differentiator’ proposition”.

5. Lack of standardization

Organizations with multiple departments often follow inconsistent practices, resulting in a lack of cross-functional collaboration. Adapting to regulatory requirements can be challenging in such a scenario. Implementation can be particularly challenging, error-prone, resource-heavy, and inefficient, all of which can lead to operational risks.

How to solve it?

  • Create a unified compliance framework with standardized practices
  • Ensure centralization of documents and encourage collaboration

Streamline compliance workflows with Sprinto

Regulatory risk management frameworks

Regulatory risk management frameworks provide a structured approach to managing potential risks and safeguarding operations in an uncertain environment. Some popular regulatory risk management frameworks include:

COSO ERM framework (Committee of Sponsoring Organizations of the Treadway Commission)

The COSO Enterprise Risk Management framework is an integrated framework that is widely accepted by organizations to stay competitive and agile in an uncertain environment. 

The standard was launched in 1992 with a focus on internal controls while the latest publication released in 2017 is focused on strategy, performance, and creating value.

The COSO ERM framework has five constituent components—the control environment, risk assessment, control activities, information and communication, and monitoring activities. These components lay the foundation and enable companies to comprehensively manage regulatory risks.

NIST RMF (National Institute of Standards and Technology)

NIST Risk Management Framework is a structured set of guidelines that integrates risk management activities into the development of the information systems lifecycle. The risk-based approach and implementation of standardized, repeatable processes help address regulatory risks.

Additionally, the framework is aligned with regulations such as FISMA and ensures robust protection measures. The 7-step process in the NIST RMF include:

  • Preparing, 
  • Categorizing,
  • Selecting, 
  • Implementing, 
  • Assessing, 
  • Authorizing
  • Monitoring.

ISO 31000

ISO 31000 is an international standard for risk management. It provides guidelines on developing and implementing risk management processes that help minimize various kinds of risks. These regulatory risks can range from financial concerns to legal liabilities or strategic misses.

The latest version, ISO 31000:2018 lays down the core principles of establishing a regulatory compliance risk management framework:

  • Inclusive
  • Dynamic
  • Best available information
  • Human and cultural factors
  • Continual improvement
  • Integrated
  • Structured and comprehensive
  • Customized.

COBIT (Control Objectives for Information and Related Technologies)

COBIT is a framework developed by ISACA that focuses on IT governance and helps with enterprise risk management. It aligns with industry standards and best practices and helps organizations implement controls required by regulations such as GDPR, Sarbanes-Oxley Act etc.

COBIT was first released in 1996, and the latest version is COBIT 2019. The framework focuses on adopting a holistic approach, maximizing stakeholder value, and optimizing governance and management processes.

Basel III framework

Basel III is a set of international standards developed by the Basel Committee on Banking Supervision (BCBS) for the banking sector. It aims to enhance a bank’s ability to absorb shocks that arise from any economic crisis and strengthen their risk management.

Basel III was first introduced in response to the financial crisis of 2007-09 and has 3 key pillars—capital adequacy requirements, supervisory monitoring, and market discipline.

How to conduct a regulatory compliance risk assessment

Continuous identification and redressal of regulatory risks is crucial to ensure the long-term sustainability of the organization and support well-informed decisions. That is why you need regular risk assessments.

Check out the steps to conduct a regulatory compliance risk assessment:

1. Identify the relevant regulations

Start by understanding the regulatory obligations that apply to your organization. The applicability will depend on the type of industry you work in, the type of data you handle, and the geography your clients reside in. For example, if you handle sensitive cardholder information, PCI DSS standards will apply and if you are a healthcare organization, you will be subject to HIPAA regulations.

Regulatory needs can also arise from client demands. For example, services-only business models are being increasingly asked for SOC 2 even when they do not directly process data. This is because they use technology for their operations and clients want to be assured of secure processes.

2. Establish context

Define the purpose and objectives of the regulatory compliance risk assessment. Is it to prepare for an upcoming audit or driven by changes in any applicable regulations?

Define the scope and specify which parts of the organization needs to be included in the assessment—departments, processes, systems, and any other elements. Next, identify the types of risks that will be assessed along with the criteria for assessment. Do not forget to mention the key stakeholders involved along with the assessment methodology.

3. Discover and assess regulatory risks

This step focuses on understanding the areas where regulatory risks can occur. Once you map all the regulatory requirements you can list internal policies in place to satisfy these risks. Other ways to identify these risks include reviewing results from previous audits, analyzing past incidents, conducting stakeholder brainstorming sessions, and leveraging legal and compliance experts.

4. Analyze the current control environment

Understand the effectiveness of current controls and their ability to mitigate the identified risks. This is done by mapping risks to controls to assess whether all significant risks are addressed. It will help you pinpoint gaps in current measures and lay the foundation for developing a tactical action plan.

5. Implement risk mitigation strategies

Categorize risks based on severity, likelihood, and impact. Low-priority risks can be accepted, while medium impact risks can be transferred through insurance or outsourcing.

High-priority risks need to be remediated. This is done by enhancing existing controls or implementing new measures. Alternatively, this can be done by updating policies or creating new ones, conducting training sessions to raise awareness, and establishing processes for regular internal audits.

6. Continuously monitor and improve

Establish a continuous monitoring mechanism to maintain the default compliance stage. Conduct regular internal audits and assessments to evaluate and report compliance status. Also maintain thorough documentation of the findings and remediation measures to establish a process of continuous feedback and improvements.

Check out how Sprinto can help with integrated risk management:

Manage regulatory risks with Sprinto

While regulatory issues are increasingly recognized as business challenges, staying updated with regulatory changes should not divert your focus from strategic initiatives. That is why you need a way to streamline compliance processes and reduce manual workload. Enter Sprinto.

Sprinto is a next-gen GRC tool that can do most of the heavy lifting for your organization and ensure you stay compliant. 

  • The platform can map controls to requirements based on the applicable regulations
  • Integrated risk management module that comes with a risk library can help you identify risks and add custom risks unique to your business. 
  • The quantitative assessments can help you score risks based on likelihood and impact and automated guidance on risk mitigation strategies to simplify the risk management process.
  • Any control failures are automatically detected and high-fidelity alerts are sent for proactive action
  • Sprinto also features in-built policy templates, training modules, automated evidence collection, vendor management, and more that can help you manage all aspects of compliance within your budget.

Talk to an expert today and kickstart your journey. See Sprinto in action.

FAQs

What is the difference between legal and regulatory risks?

Legal risks arise from failure to meet laws and legal standards or violation of contractual agreements. Regulatory risks on the other hand arise from changes in laws and regulations that the organization is not able to keep up with.

What role do compliance software play in mitigating regulatory risks?

Compliance management software can help with the automated mapping of regulatory compliance requirements and streamline workflows. They ensure policy management, coordinate training and help with continuous monitoring and evidence collection to help you stay abreast of the compliance regulations.

Who is responsible for ensuring regulatory risk management?

The responsibility to ensure regulatory risk management falls on various stakeholders including executive leaders, Chief Compliance Officer, compliance teams, legal counsel, IT teams, the People-Ops team and employees.

Payal Wadhwa

Payal Wadhwa

Payal is your friendly neighborhood compliance whiz! She turns perplexing compliance lingo into actionable advice about keeping your digital business safe and savvy. When she isn’t saving virtual worlds, she’s penning down poetic musings or lighting up local open mics. Cyber savvy by day, poet by night!

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