Regulatory compliance 101: Definition, requirements & solutions
The modern corporate world is evolving faster than ever, adopting new technologies, responding to new threats and adapting to new stakeholder expectations on social responsibility. That makes regulatory compliance — the ability to comply with industry — and sector-specific regulations — a hot topic among both boards and regulatory bodies.
This ever-growing regulatory burden creates a continuous challenge for businesses striving to comply; the Ukraine crisis and the Israel-Palestine War are very live examples of the unexpected threats that can shift the demands of compliance and risk management.
To help, this article will explain:
- What regulatory compliance is and why it's important
- The benefits of regulatory compliance
- Types of regulations
- Regulatory compliance requirements in the U.S., the E.U. and by sector
- The consequences of non-compliance
- How to ensure compliance with regulations
What is regulatory compliance?
Regulatory compliance definition: The policies and practices corporations use to comply with external mandates, usually from governing bodies like the Securities and Exchange Commission (SEC).
While corporate compliance refers to a firm’s ability to follow its own rules and policies or to adhere to industry norms and best practices, regulatory compliance is a mandatory requirement with significant potential penalties.
Regulatory is multi-faceted and can mean different things, not just for different businesses but for different elements of a single business.
- It can relate to your operations — the fundamental ways you run your business.
- It can mean that your marketing collateral and customer communications must meet certain standards.
- It also means that you must prove that the processes you have followed meet expectations.
It’s not just the result that counts when it comes to regulatory compliance; the importance of compliance monitoring cannot be underestimated. Marketing collateral, for instance, should have a clear audit trail of reviews and approvals by someone designated to undertake compliance duties at your firm. Having comprehensive compliance reports to evidence your processes and checks is essential if you are ever subject to any form of external audit or compliance monitoring.
Why is regulatory compliance important?
Compliance with regulatory requirements matters on many levels. An organization that meets its regulatory obligations signals to customers and stakeholders that it operates ethically, with integrity, and within the laws and rules that govern it.
Additionally, the volume of laws, regulations, industry standards and requirements has risen exponentially over recent years. Simply put, regulation now touches every sector and every area of business in today’s corporate landscape.
As well as increasing the number of requirements you need to meet, the constantly changing nature of regulation makes it more important than ever that your company maintains a robust compliance program. Keeping track of current requirements and ensuring compliance across your organization is a significant challenge. It's certainly not an area for complacency.
The benefits of regulatory compliance
Corporations that take regulatory compliance seriously:
- Strengthen their reputation: Regulatory compliance is a fundamental building block for your brand and corporate reputation. Trust is a huge consideration when it comes to successful brands; customers and clients choose to buy from companies they have faith in. An increasing focus on ethics, provenance and governance makes regulatory compliance an increasingly important element of corporate brand equity.
- Protect their bottom line: Businesses can cut costs on both sides of regulatory compliance. This includes the costs of penalties and remediation, the costs of rectifying any inadequate processes, the costs of recalling non-compliant products or promotions, the indirect costs of the time taken on these actions, and the opportunity cost of lost sales due to reputational issues.
- Safeguard stakeholders: Most regulations are designed to protect either your business, your employees, your customers or in some cases, the public at large. Any failings put one or more of these at risk.
- Reduce risk: As businesses’ digital transformations accelerate, the risks they face and compliance obligations they need to meet amplify, too: issues like data protection and cybersecurity come to the fore. Noncompliance with best practices and regulations leaves companies wide open to data and security breaches.
Types of regulations to comply with
All firms have to comply with some degree of regulatory action. Regulations may, for instance, emphasize the safety of their operations or ensure that their hiring policies follow requirements designed to ensure equal opportunities.
Some of the most common mandates firms must manage are:
- Financial regulatory compliance: These regulations relate to how corporations manage the U.S. financial services sector. You might be governed by one of the many agencies that regulate the industry; in the U.K., the Financial Conduct Authority regulates financial services.
- Healthcare regulatory compliance: Regulation in healthcare works to safeguard patient health and privacy. The most well-known requirement in the U.S. is the Health Insurance Portability and Accountability Act (HIPAA).
- Cybersecurity compliance: As the business landscape is increasingly virtual, regulators look to protect the security of data. HIPAA may also fall in this category, as does the U.S.’s Payment Card Industry Data Security Standard (PCI DSS), which regulates transaction data.
- ESG compliance: In the U.S. and the EU, regulators are increasingly holding firms accountable for their environmental, social and governance impact.
Examples of regulatory compliance
Some examples of regulatory compliance requirements specific to particular sectors include:
- The need for financial services firms to meet rules set by the Federal Reserve Board (FRB), the Federal Deposit Insurance Corp (FDIC), and the Securities and Exchange Commission (SEC)
- Requirements set by the Food and Drug Administration (FDA) for U.S. pharmaceutical and food companies
Some that apply across sectors include:
- GDPR, the General Data Protection Regulation that covers any organization processing data on EU citizens
- Requirements to file annual financial reporting
- The requirement for in-scope U.S. organizations to file an EEO-1 Report
- The need for compliance with the Sarbanes-Oxley Act
Regulatory compliance requirements
One challenge with regulatory compliance is the constant evolution of your obligations; the meaning of regulatory compliance is ever-changing, and the regulations to comply with vary by industry, sector and location.
Some sectors and corporate activities are more heavily regulated than others. For example, compliance is critical in sectors like pharmaceuticals and food to ensure consistency and standards and in healthcare to safeguard patients.
Different countries also have different regulatory standards. Some apply only to corporations headquartered in that country, while others apply to any firm doing business there.
Regulatory compliance in the U.S.
Some predicted changes to U.S. regulatory compliance in 2024 include:
- Increased focus on consumer protection in financial services.
- Federal banking regulation that requires banks and other regulated entities to report data security incidents within 36 hours.
- Also, in financial services, more active regulation around digital assets where “firms will need to respond quickly” to changing rules.
- Adoption of climate-related regulation, such as the SEC’s proposed climate disclosure recommendations related to the Climate Risk Disclosure Act.
Regulatory Compliance in the E.U.
Similarly, the EU’s regulatory playing field is becoming more crowded:
- The Digital Services Act charges Big Tech firms with removing illegal content from their sites or facing financial penalties of up to 6% of global annual revenue and will apply to all platforms as of April 2024
- The evolution of the European Green New Deal, which charges corporations to help Europe become the first net-neutral continent by 2050. This includes efforts like measuring greenhouse gas (GHG) emissions.
- Many regulatory changes are now in force in climate disclosures, particularly the Corporate Sustainability Due Diligence (CSDD) Directive.
Your compliance program also needs to be compliant; the U.S. DOJ issued guidance in 2020 outlining what is expected of corporate compliance programs in terms of design, application and effectiveness.
The costs of noncompliance
Firms that breach regulatory requirements can face significant fines, lawsuits or other financial penalties. In the worst-case scenario, regulators can ban firms from operating in certain markets or altogether.
Firms can also face growing fines and lawsuits due to corporate data breaches, for instance, with the average cost per cyber breach jumping from $4.4 million to $7.2 million during 2017—2018.
Businesses can also have remedial action enforced upon them. For instance, in the UK, the FCA can mandate that non-compliant financial promotions be removed from circulation. There are also steep SOX penalties in the U.S. depending on the violation.
The reputational repercussions of noncompliance with regulatory requirements can also be significant. Regulators tend not to be shy about publicizing transgressions as a warning to other firms about the potential penalties; negative headlines can be an unwelcome side-effect of regulatory breaches.
Learn more about the consequences of noncompliance here.
How to ensure regulatory compliance
Ensuring regulatory compliance starts by identifying the regulations you must follow. It then typically involves the following steps:
- Auditing: Assess and review your current approach to regulated processes to identify any shortcomings and make a plan to remedy them.
- Assigning roles and responsibilities: Who is responsible for regulatory compliance? Do you have a dedicated compliance team or compliance officer? Establishing who’s responsible for regulatory compliance will help drive execution.
- Developing policies: Set clear compliance policies and review them frequently to ensure they keep pace with a changing regulatory universe. You should be aiming for a continuous improvement ethos when it comes to regulatory compliance.
- Documenting: Ensure that you capture and audit your approach, for example, when following anti-money laundering requirements.
- Training: Are employees clear on the role they have in regulatory compliance? Establishing a culture of compliance demands that everyone plays their part.
- Testing: Monitor your internal controls to ensure that you meet regulatory requirements, such as checking that food is produced or stored at the correct temperature.
- Measuring: Part of proving regulatory compliance is measuring your efforts. This might mean measuring your impact, like how much greenhouse gases you emit, or it might mean quantifying your efforts, like the number of breaches you’ve prevented.
- Reporting: Collect and centralize evidence that you have met certain requirements, for example, reporting around your climate-related obligations.
Turn regulatory compliance into a tool for success
The constantly shifting sands of the regulatory landscape and the competing challenges for board and leadership time can make compliance feel like an impossible ambition, a rainbow’s end that always stays at an elusive distance — unless you implement a risk-based regulatory compliance program.
Risk-based regulatory compliance enables you to focus efforts on key compliance priorities and stay abreast of changing obligations so you can take a more proactive approach. This positions you as a strategic risk partner to your board and enables leadership teams to make better decisions based on current, comprehensive insight.
Find out more about how Diligent can help you maximize compliance risk mitigation and achieve your regulatory compliance objectives.
