Role of Business Rules Engines in Financial Compliance and Risk Management Automation

Why won't they let us just do business? 

We'd all like to acquire customers, grow revenue, optimize processes, and take care of the bottom line. And yet we are constantly being held by regulatory bodies imposing compliance requirements on us. 

It's all for a reason – for the sake of our dear customers, their privacy, and data security. And some companies paid dearly for not taking care of it.

According to a review of the 2018 Annual Reports, the Securities and Exchange Commission (SEC) pursued significant enforcement actions. They recovered $794 million for investors harmed by non-compliant firms and individuals. Additionally, the SEC secured judgments and orders totaling over $3.945 billion in penalties against these wrongdoers.  Furthermore, the Financial Industry Regulatory Authority (FINRA) also imposed regulatory fines in 2018, reaching $61 million.

How Important Financial Compliance and Risk Management Are

A 2023 Deloitte report estimates that compliance costs, which often include risk management activities, can range from 2-5% of a company’s total revenue.

However, research shows that the consequences of non-compliance are skyrocketing, often dwarfing the costs of actually following the rules. Organizations must ensure compliance with all the rules defined by regulatory bodies, which can be challenging due to the complexity and volume of regulations.

According to Ponemon Institute LLC the average cost of compliance is $5.47 million. Meanwhile, the average cost of non-compliance reached $14.82 million.

It can take anywhere from $7,7 million to over $30 million for a company to meet or maintain compliance. However, as pointed out by Fortra, the cost of non-compliance can be twice as big.

Data security takes the top spot for compliance spending, but for many businesses, the driving force behind this investment isn’t necessarily to tighten their own security posture, but rather to meet legal and regulatory requirements.

According to a report by FMP Global, “The True Cost of Non-Compliance in Business” non-compliance often leads to business disruption beyond just fines. This can include investigations, production stoppages, and reputational damage, all of which can be far more expensive than implementing compliance measures in the first place. Non-compliance can also expose organizations to a wide range of business risks, including financial, legal, and reputational threats.

Various Types of Financial Risks and Risk Analysis

Credit Risk

At its core, credit risk revolves around the uncertainty of borrowers meeting their obligations. It's the looming shadow over financial institutions when the question arises: "Will our borrowers repay their debts?" This risk becomes particularly tangible in the form of non-performing loans, which can significantly dent the institution's financial health and erode its profitability. 

Market Risk

Market risk, on the other hand, is the volatility that comes with changes in market variables, such as interest rates, exchange rates, and stock prices. It's the financial equivalent of weathering a storm at sea, where sudden changes can capsize an otherwise stable vessel. Institutions face the challenge of predicting these changes and shielding themselves from potential losses.

At the same time, agile management and swiftly adjusting to changing conditions can shorten the time to market by a huge margin, providing your company with a competitive edge.

Operational Risk

The third adversary, operational risk, emerges from within. It encompasses the risks associated with failed processes, systems, and policies. In particular, inadequate or failed internal processes can be a significant source of operational risk, highlighting the need for organizations to identify, monitor, and mitigate these vulnerabilities.

From cyber-attacks to internal fraud, operational risk reminds institutions of the importance of robust internal controls and the constant vigilance needed to ensure smooth sailing.

Contingency Planning and Decision Making

Contingency planning is a key component of any robust risk management process, ensuring that organizations are prepared to respond effectively when unexpected events or disruptions occur. By proactively identifying potential risks and evaluating their likelihood and impact, businesses can develop a comprehensive risk management plan that outlines clear steps to take if an incident occurs.

The first step in effective contingency planning is thorough risk identification. This involves assessing both internal and external factors that could threaten business operations, from cybersecurity breaches and supply chain disruptions to natural disasters and regulatory changes. Once these potential risks are identified, organizations can prioritize them based on their probability and potential impact, allowing the risk management team to focus resources where they are needed most.

Developing a contingency plan means creating detailed mitigation strategies for each significant risk. These strategies may include risk avoidance, risk reduction, or risk sharing, depending on the organization’s risk appetite and business goals. A well-crafted risk management plan will also establish clear roles and responsibilities, ensuring that project teams and decision-makers know exactly how to respond if a risk materializes.

Contingency planning supports better decision making by providing a structured approach to managing uncertainty. With a solid risk management process in place, organizations can act quickly and confidently, minimizing disruptions and protecting their strategic objectives. Ultimately, effective contingency planning not only safeguards business operations but also strengthens overall resilience in an ever-changing business environment.

The Necessity for Automation in Compliance and Risk Management

EY’s 2020 report, “How automation is transforming compliance in wealth and asset management,” explores the transformative role of automation in simplifying compliance processes. Automation is typically achieved through advanced software systems that streamline compliance and risk management tasks. The report highlights how automation can lead to cost reductions and mitigate risks.

KPMG’s 2020 report, “Embracing Automation in Risk Management,” delves into the numerous benefits of automation in risk management. These benefits include improved efficiency, more informed decision-making, and reduced costs associated with manual processes.

A 2022 Gartner “Survey Analysis: Finance Executives Accelerate Automation Efforts” revealed that a significant 63% of finance executives are actively accelerating automation initiatives within their organizations. Risk management and compliance were identified as key target areas for automation.

The combined insights from these reports and data make it abundantly clear that the need for automation is a necessity.

Companies that embrace automation stand to gain significant advantages, including:

• Increased efficiency: Automating repetitive tasks frees up valuable staff time for more strategic analysis and proactive risk management. Automation supports best-in-class risk management practices by enabling organizations to identify, assess, and mitigate risks more effectively.
• Reduced costs: Automation can significantly reduce the costs associated with manual risk management and compliance processes.
• Improved decision-making: Automation facilitates data-driven decision-making by providing real-time insights and risk assessments.
• Enhanced regulatory compliance: Automation streamlines adherence to complex regulations, minimizing the risk of errors and penalties. It also helps organizations adhere to risk management standards by ensuring consistent application of compliance requirements.

Risk Management Automation with Business Rules Engine

Embracing the future of risk management means leveraging the right tools to ensure efficiency, accuracy, and compliance. With Business Rules Engines, companies are revolutionizing how they approach risk management, transforming complex processes into streamlined, automated workflows.

Here’s a closer look at how BREs are making this possible

• Rule Definition: First, organizations define rules based on their risk management policies, regulatory compliance requirements, and operational procedures. These rules are structured to reflect the conditions under which certain actions should be taken, such as flagging a transaction for review if it exceeds a certain amount, or identifying potential compliance violations. Business rules engines can be integrated with application code to automate risk management processes, ensuring that risk mitigation actions are embedded directly into operational workflows.
• Data Input and Monitoring: Data relevant to the rules is continuously monitored and input into the BRE. This data can come from various sources, including internal systems, transaction records, or external feeds.
• Condition Evaluation: The BRE evaluates the input data against the predefined rules. It does this by analyzing the data to see if the conditions specified in any of the rules are met. For example, a rule might specify that any transaction over a certain threshold should be flagged as high risk. The engine checks each transaction against this criterion.
• Action Execution: When a rule’s conditions are met, the BRE execute rules to automate responses to identified risks. Actions can vary widely, from sending alerts to relevant stakeholders, triggering additional review processes, executing transactions, or blocking activities that are non-compliant or deemed risky.
• Continuous Updating: BREs are dynamic systems that allow for rules to be updated or added as regulations change, new risks are identified, or business processes evolve. This ensures that risk management strategies remain current and effective. BREs support risk professionals in mitigating risks by enabling rapid updates to risk management strategies and controls. It also lowers the IT dependency allowing business users to make changes without compromising business logic.
• Reporting and Analysis: BREs often include reporting and analysis capabilities, providing insights into the risks identified, the actions taken, and the outcomes of those actions. BREs can generate and maintain a risk register, documenting identified risks, mitigation plans, and risk owners. They support the development and tracking of mitigation plans and implementing strategies for risk reduction. BREs help organizations assess risks and perform risk analysis to determine overall risk exposure. They can be used for cybersecurity risk management, including the identification and mitigation of cybersecurity risks and security breaches. BREs support risk management programs, including supply chain risk management and project risk management. In project management, BREs help identify and manage project risks, with project managers leveraging opportunity management to address both threats and opportunities. BREs also support business management and business strategy by aligning risk management activities with company goals and the organization's objectives. They can facilitate risk transfer strategies, such as contracting with an insurance company, and support risk retention as a viable strategy when appropriate. BREs help organizations prioritize risks with a higher probability of occurrence and support informed business decisions. They also help organizations identify possible risks and support compliance with risk management standards developed by international organizations.

Streamlining Financial Compliance with Higson BRE

Business Rule Engines, like Higson, facilitate financial compliance by automating the decision-making processes that adhere to regulatory standards and guidelines. 

Here’s how Higson helps with financial compliance:

• Automating Compliance Processes: just like most business rules engines, Higson automates complex compliance procedures by applying predefined business rules. This can reduce manual data entry, which is slow and error prone.
• Regulatory Adaptability: Financial regulations frequently change. Higson allows institutions to quickly adjust their operations to new regulatory requirements by updating the rules within the engine, without the need for extensive software redevelopment. This agility is crucial for maintaining continuous compliance with evolving laws and standards.
• Consistent Application of Rules: By codifying compliance rules within the business rule engine, financial institutions ensure consistent application of these rules across all transactions and processes. This consistency is vital for avoiding compliance violations that could result from human error or misinterpretation of regulations.
• Real-Time Compliance Monitoring: Higson can monitor transactions and processes in real-time, identifying and flagging potential compliance issues as they occur. This immediate feedback allows institutions to address compliance risks proactively, rather than reacting to breaches after they've happened.
• Detailed Audit Trails: BREs automatically document all decisions made and the rules applied to those decisions. This audit trail is essential for demonstrating compliance to regulatory bodies, facilitating easier and more efficient audits.
• Scalability and Efficiency: As financial institutions grow, the volume of transactions and the complexity of compliance requirements increase. BREs scale to handle increased volumes efficiently, processing large numbers of transactions quickly and accurately, ensuring that compliance is maintained without compromising performance.

How Can Higson Help Your Business?

Discover the transformative power of Higson in enhancing your financial compliance and risk management processes. As an executive, understanding the real-world applications and benefits of Higson within your organization can be a game-changer. 

We encourage you to reach out to us today to request a tailored use case for your company.

‍

‍