From CompliNEWS | Financial Service Intelligence Watch
Operational ability in financial services is about building a robust foundation for compliance
By Compli-Serve
In financial services, operational ability is critical for maintaining regulatory compliance and ensuring a firm’s resilience in a dynamic environment. Defined broadly, operational ability refers to the systems, processes, and human resources a company has in place to conduct its activities in line with regulatory requirements. In South Africa, the Financial Advisory and Intermediary Services (FAIS) Act highlights operational ability as a key compliance component, emphasising the importance of adequate resources, governance structures, and risk management frameworks. Here, we explore the fundamentals of operational ability and why they are essential for firms navigating today’s regulatory landscape.
Human and technical resources
For any financial services provider (FSP), having the right people and technical resources is foundational. This includes staff members with the skills and qualifications needed to execute and oversee financial activities effectively. In addition to human capital, technology plays a crucial role, from client data management systems to secure communication channels. Together, these resources enable an FSP to maintain day-to-day operations while adhering to regulations.
Governance frameworks
Effective governance provides structure, setting clear roles and responsibilities for leadership, oversight committees, and operational teams. Governance frameworks establish the policies that guide a firm’s decision-making processes, ensuring they align with ethical standards and regulatory obligations. In this way, strong governance promotes accountability, reducing the likelihood of misconduct and ensuring fair treatment of clients.
Risk management and internal controls
Regulatory bodies require FSPs to implement robust risk management frameworks that include internal controls to monitor, assess, and mitigate risks. Risk management policies should encompass both conduct risk and compliance risk, with specific procedures to ensure ongoing compliance with legislation such as FAIS and anti-money laundering (AML) laws. Furthermore, by setting an acceptable risk threshold, companies can better navigate uncertainties, making proactive adjustments when needed.
Outsourcing arrangements
Many firms outsource certain functions to improve efficiency or tap into specialised expertise. However, outsourcing can introduce risks if not managed properly. To ensure regulatory compliance, FSPs need an outsourcing policy that covers service provider selection, performance assessment, and contingency planning. The policy should also include provisions for regular reviews of outsourced activities to confirm that they meet the same standards as in-house functions.
Business continuity and financial recovery plans
Business continuity planning (BCP) is essential to prevent and mitigate disruptions to operations, whether due to technological failures, natural disasters, or other unforeseen events. Regular testing of BCPs is recommended to confirm that plans are effective and capable of safeguarding critical functions. Additionally, a financial recovery plan can provide a structured approach to restoring financial stability following unexpected financial challenges.
The role of compliance in operational ability
Operational ability is integral to a company’s compliance function, which works to align operations with regulatory requirements. Compliance teams are responsible for designing, implementing, and updating policies that support the broader operational structure. For example, compliance oversight ensures that processes for client onboarding, data security, and transaction monitoring are not only efficient but also meet all regulatory standards. Regular compliance reviews allow companies to detect and address any potential issues early, promoting a culture of proactive risk management and compliance.
Challenges and recommendations
Operational ability is increasingly complex, particularly as regulatory demands grow and technology advances. Companies face several challenges, such as ensuring consistent application of policies, managing risks from third-party providers, and keeping pace with new regulations. To address these challenges, firms should consider:
- Compliance and risk management policies should be reviewed annually or as needed to reflect changes in the regulatory landscape or company structure.
- Training employees on both regulatory requirements and the firm’s internal policies enhances understanding and ensures consistent application across departments.
- Conduct regular performance evaluations for outsourced functions to ensure service quality aligns with the company’s compliance standards.