Mastering Compliance in a Complex Financial Landscape (With a Proactive Risk Lens)

Compliance and risk leaders are grappling with unprecedented challenges in today’s evolving financial landscape. Enforcement mechanisms are fading, regulatory staffing is thinning, and yet — ironically — the complexity of regulatory obligations has not. Financial institutions are expected to navigate a myriad of risks while adapting to ever-changing rules and expectations. Compliance and risk leaders face multifaceted issues, and they must strike a delicate balance between regulatory adherence and strategic growth. The question becomes: How do you foster a culture of compliance when oversight itself is in flux?

The answer lies in maturing the compliance posture from reactionary activity to preemptive risk management, an approach that not only avoids adverse headlines but enables sustainable growth.

The Biggest Challenges Facing Compliance Teams

Most compliance and risk leaders are working to hit a moving target. With so many complexities to be mindful of, it can be easy for leaders to lose sight of their ultimate goal. This can stem from several themes, both internal and external, that continue to surface in financial services:

• Leadership's Influence on Compliance Culture: Challenges in compliance often stem from the tone set at the top. When leadership at a fintech or a BaaS bank does not prioritize or adequately support compliance initiatives, it creates an environment where ethical breaches and regulatory lapses are more likely to occur.
• Growth-Focused Blind Spots: In organizations with sales-led strategies where management is heavily focused on aggressive growth and frictionless sales, there is a tendency to overlook the importance of having robust risk management and compliance programs. This narrow focus often leaves compliance under-resourced, creating systemic blind spots, leaving fintechs and Banking-as-a-Service (BaaS) banks vulnerable to regulatory risks and operational failures.
• The Peter Principle in Compliance Leadership: As organizations grow, it is essential for management to ensure that compliance and regulatory leaders have the right skills necessary for each stage of the growth cycle. Without careful oversight, managers may grow into or be promoted beyond their capabilities for an evolving role, resulting in a leadership team that may be ill-equipped to manage the complexities of a more advanced program. Thus, the Peter Principle effect causes skill misalignment as firms scale, which leads to compliance leadership being unprepared to meet the demands of scaling operations, resulting in governance breakdowns at exactly the moment when maturity is most needed.
• Short-Term Financial Focus vs. Long-Term Regulatory Impact: Finance departments, driven by the need to deliver strong quarterly financial performance, may underestimate the long-term costs of regulatory compliance. Not considering the present value of potential regulatory impacts can lead to inadequate investment in compliance resources, exposing an organization to substantial future financial risks. When risk management is done right, its value is often difficult to measure. But when it's done wrong, the costs become painfully evident after the fact.
• Benchmarking Errors in Compliance Metrics: Relying on flawed benchmarking can lead to mistaken conclusions in compliance strategy. Peer benchmarking (e.g., staffing) based solely on asset size—rather than transaction complexity, volumes, or customer profiles—create a false sense of adequacy. This often leaves fintechs and BaaS banks underbuilt and unprepared.

The Hidden Cost of Non-Compliance

When compliance is sidelined due to perceived regulatory quiet, the organization accumulates an elevated level of residual risk. Without strong internal guardrails, missteps, even small ones, can cascade into outsized reputational and operational losses.

Risk left unmanaged often multiplies in cost and complexity over time.

The expected or actual cost of regulatory penalties often extends far beyond a settlement amount. Firms that need robust compliance programs according to regulations and statutes face a host of additional expenses, including costly legal fees, expensive third-party advisors, and the need for staff augmentation to complete any potential remediation activities. However, the most significant, yet often overlooked, consequence is the substantial distraction of management from their primary role in driving business growth.

Throughout the lifecycle of an adverse regulatory exam, diversion of management’s time and focus can not only be measured as a direct cost but also lead to significant opportunity costs, potentially hindering the organization's long-term success.

RISK TIP: The absence of regulatory enforcement does not mean the absence of risk, only the delay of impact. Align residual risk with your Board's stated risk tolerance, not with perceived regulator silence.

Risk Committees as Strategic Forums

In an era of less external oversight, internal accountability becomes your most durable control. A well-structured Enterprise Risk Committee (“ERC”), composed of senior leaders from across the organization, should serve as an effective forum for orchestrating risk management. Regular, structured discussions within the ERC will memorialize key risk-based activities, foster a safe space for ideation, and promote cross-functional dialogue. Further, it creates a defensible record of internal governance, especially critical when external scrutiny resurfaces.

To prepare senior leaders for resilience, ERCs should also be viewed as a constructive “challenge” environment in which to think about the “what ifs.” This approach leverages diverse perspectives, enabling a comprehensive, adaptive, and dynamic response to evolving risks.

Non-Linear Risk Scoring

Financial Institutions must reflect appropriate risk determination in their assessments. Adopting a non-linear, risk measurement framework will result in better resource allocation and scenario planning when applied to the weights of both impact and probability exponentially.

Non-linear scaling provides a more accurate and nuanced understanding of risk, emphasizing that not all risk levels increase simultaneously. Further, a dynamic scoring system with adaptive thresholds is essential to avoid resource misallocation and enhance agility against emerging threats:

• A linear risk scale (e.g., 1, 2, 3) implies a proportional increase in risk, where a high-risk level (3) is just 50% more risky than a moderate level (2). This suggests that risk increases steadily and predictably at a decreasing proportional rate, which may create a false reliance on the linear averages.
• A non-linear scale (e.g., 1, 3, 9) reflects a more realistic, exponential increase, where a high-risk level (9) is three times more risky than moderate (3). This approach acknowledges that some risks escalate dramatically, capturing higher-risk scenarios' greater severity and potential impact.

The Right Data Strategy Can Help

While various fintech solutions offer valuable features and benefits, a fintech or BaaS bank's data strategy is often the most critical determinant of compliance success. An optimal data architecture should centralize customer and transaction data independent of third-party compliance tools. By maintaining an agnostic data structure, fintechs and BaaS banks can be agile and able to seamlessly integrate and switch between different compliance tools as needed, avoiding dependency on any single vendor. This approach ensures greater third-party flexibility and prevents situations where data ownership is compromised, and switching costs become prohibitively high.

AI’s Blade is Double Edged

Implementation of AI tools with appropriate oversight and understanding can substantially streamline processes and mitigate operational risk in areas of transaction monitoring, financial crime detection, policy management, and more. These tools may be off-the-shelf, customized, or home-grown. Achieving successful outcomes is dependent on leveraging a good data strategy and AI tested tools, while understanding their limitations and implementing proper governance.

On the other hand, delayed AI adoption hands your competitors the very edge you're trying to gain.

Sustaining Compliance as a Competitive Advantage

The compliance landscape for today’s financial institutions is fraught with complexities and challenges. Firms can successfully navigate these challenges using adaptive compliance programs to win trust, build strategic partnerships, and navigate audits with confidence.

This is accomplished by fostering a culture of compliance, prioritizing effective leadership, adopting non-linear risk measurement strategies, and implementing a robust data strategy that is AI compatible.

Firms that lead prepare for visibility, even when no one is looking. They consider compliance not as insurance, but as governance-as-strategy to mitigate risks and lay a strong foundation for sustainable growth and long-term success.

Larry Gordon is Managing Director of Risk Management and Compliance at Endurance Advisory Partners, a bank risk management consulting firm.