What is Regulatory Compliance? | Importance and Best Practices

Regulatory compliance means following the laws, rules, and standards set by governments and regulatory bodies like FINRA, SEC, FDA, NERC, and the Financial Conduct Authority (FCA). Regulations differ based on the industry and location. Global companies must adhere to laws in all countries they operate in. Industries like finance, IT, and healthcare face many regulations due to their impact on the economy, business, and health systems. These sectors are also vulnerable to cyber threats.

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As a company grows, it faces more regulations, often complex due to overlapping jurisdictions. To comply, businesses must establish the right policies and processes.

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For example, major regulatory compliance requirements for both financial and non-financial sectors include the Sarbanes-Oxley Act, Health Insurance Portability and Accountability Act (HIPAA), Payment Card Industry Data Security Standard (PCI DSS), Federal Information Security Management Act (FISMA), and the European Union’s General Data Protection Regulation (GDPR).

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Regulatory Requirements

These are official rules set by government bodies or authorized groups to regulate an industry, process, or sector. Organizations need to follow these rules to avoid fines and promote ethical behavior.

Regulatory Compliance in the U.S.

In the United States, there are various laws and regulations designed to safeguard different stakeholders, including businesses. Compliance laws serve to shield consumers from any negative impacts of a company’s actions, uphold the company’s reputation, and help top management steer clear of legal trouble. These regulations are adapted to specific industries and are overseen by dedicated bodies to ensure adherence.

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For Instance, the financial sector operates under laws like the Dodd-Frank Act and the Sarbanes-Oxley Act (SOX). The Dodd-Frank Act aims to enhance economic stability by promoting transparency and accountability. It led to stricter regulatory compliance for banks regarding trading practices, investments, and reserves.

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On the other hand, the Sarbanes-Oxley Act (SOX) was established to shield stakeholders of publicly traded firms from deceitful accounting and financial behaviors. SOX governs corporate activities such as financial report certification and record-keeping.

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Regulatory Agencies in the U.S.

The Federal Trade Commission: Protects consumers from deceitful business practices by establishing a competitive market through antitrust laws.

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The Food and Drug Administration: Regulates the companies that manufacture cosmetics, food products, and drugs. It also oversees manufacturers of medical devices.

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Learn more about the FDA Compliance at our detailed blog: FDA Cybersecurity Compliance.

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The Occupational Health & Safety Administration: This organization ensures a safe and healthy work condition by enforcing standards and regulating working conditions.

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The National Institute of Standards and Technology: Develops standards and guidelines to help organizations meet regulatory compliance requirements, such as IT and data security.

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Why is Regulatory Compliance Important?

The importance of regulatory compliance lies in maintaining the honesty of business operations and safeguarding both public and stakeholder interests. It ensures that businesses function fairly and morally.

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Effective regulations shield consumers from harmful practices like predatory lending that triggered the 2008 financial crisis. Compliance also shields company leaders from legal consequences and career setbacks resulting from their direct actions.

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A strong regulatory compliance plan enables organizations to anticipate and manage risks proactively, positioning them for future challenges.

Benefits of Ensuring Regulatory Compliance

Businesses that uphold regular regulatory compliance practices can experience substantial advantages in both the short and long term. Key benefits include staying clear of unnecessary legal problems.

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Avoid Unnecessary Legal Issues

Regulatory frameworks guarantee that essential legal responsibilities are fulfilled. For instance, sectors handling extensive user data can sidestep legal troubles by adhering to regulations like GDPR. Consequently, the expenses linked to compliance are notably lower compared to the repercussions of non-compliance.

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Improved Workplace Efficiency

Establishing rules against discrimination and harassment in the workplace creates a positive work environment and increases organizational productivity and efficiency. Implying safety and security regulations helps prevent incidents and boosts resilience.

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Encouraging Fair Competition

Regulatory compliance reduces unfair monopolies that hinder competition. Adhering to such rules promotes fair practices that stimulate innovation. This motivates organizations to provide high-quality products and services and avoid stagnation in design, production, and delivery processes.

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Increased Brand Reputation

Meeting regulatory requirements can enhance public relations by retaining stakeholder confidence. Organizations can leverage this commitment to compliance in branding and marketing efforts to showcase adherence to ethical standards and norms.

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Mitigating Risks and Boosting Profitability

Sustaining profits relies on maintaining customer loyalty. By following regulatory standards, businesses can uphold customer trust. For instance, safeguarding customer data from breaches serves as a competitive advantage. Additionally, reliable and secure organizations attract business partners, stronger collaborations, and partnerships.

What are the Consequences of Non-compliance?

Failure to comply with legal obligations leads to non-compliance in business. More and more organizations are now giving importance to regulatory compliance as a crucial strategic necessity. According to MetricStream’s State of Compliance Survey Report from 2021, 64% of organizations plan to enhance their regulatory and internal compliance assessments.

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Apart from non-compliance, breaches in regulatory compliance can bring about various negative outcomes, including:

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Penalties

Non-compliance often incurs monetary penalties, which can accumulate over time. The fines for non-compliance are substantial, sometimes reaching millions of dollars. For example, severe violations (under GDPR) result in penalties of up to 20 million euros or 4% of the annual global turnover. Organizations that knowingly break the law might subject their leaders and management to personal liability and potential imprisonment in extreme cases.

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Business Disruption

Non-compliance may lead to business suspension or disqualification from government contract bids. Legal actions and lawsuits can disrupt business operations, causing additional losses. This disruption can impact manufacturing processes and create vulnerabilities in the supply chain.

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Reputation Damage

Non-compliant businesses face reputational damage among consumers, clients, business partners, and the public due to negative media coverage.

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Revenue Losses

Decreased customer confidence and loyalty can lead to long-term revenue losses extending over several years. Following an incident, the organization may face stricter compliance regulations, leading to rising compliance costs steadily.

What is a Regulatory Compliance Policy?

A regulatory compliance policy acts as a roadmap for how an organization ensures it follows all the necessary laws and regulations. It is a formal document where a company confirms its commitment to complying with relevant laws. This policy details the steps and framework in place, including a compliance plan and the assignment of a compliance officer.

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With the growing volume of regulatory information each year, the policy serves as a reference to prioritize compliance processes in line with business objectives and regulatory requirements. Utilizing technology for policy and document management simplifies the creation and dissemination of organizational policies. It also offers a centralized platform to store and access the most up-to-date policies.

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How is a Regulatory Compliance Policy Formulated?

When creating a regulatory compliance policy, it’s important to consider various aspects that may differ for each organization.

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Understand the purpose of the policy: Is it to reduce compliance risks, enhance communication with stakeholders, or educate employees?

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Define the scope of the policy: Who does it apply to and in what situations? Are there any exceptions?

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Craft a policy statement: Based on the purpose and scope, outlining the guiding principles for all decisions related to regulatory compliance.

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Detail-specific actions: For regulatory compliance commitment.

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Document all procedures in place for compliance.

Appoint relevant authorities to monitor and review compliance.

Establish documentation and communication protocols.

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Typically, a Chief Compliance Officer oversees the contents of the initial policy draft, which is then reviewed with department heads to ensure its applicability throughout the organization. Open discussions and consensus can promote broader acceptance of the policy.

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Once the policy reaches a final draft, the Board of Directors takes responsibility for implementing it and ensuring that compliance is a key topic during board reviews.

Best Practices to Ensure Regulatory Compliance

Organizations can consistently meet regulatory requirements by following established best practices. While not all organizations may have dedicated compliance officers, existing staff members in suitable roles can take on compliance responsibilities with the aid of effective tools.

Here are some essential best practices for organizations to ensure regulatory compliance:

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Stay informed about regulatory changes at both industry and jurisdiction levels.

Establish and uphold a compliance code of conduct to foster a culture of compliance, promoting fairness and ethical behavior in the workplace.

Document compliance processes clearly, outlining the roles and duties of staff involved in compliance management. This documentation proves valuable during compliance audits.

Provide regulatory compliance training to employees through workshops, training sessions, and regular assessments of compliance knowledge.

Regularly review the regulatory compliance policy to address any shortcomings and keep compliance aligned with the latest regulatory updates.

Consider automating compliance tasks based on the organization’s size and requirements.

Conclusion

Regulatory compliance is crucial for businesses and should be integrated into their strategies and IT systems, especially in regulated industries. Technology plays a key role in supporting compliance with standards.

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Effective communication of sensitive information is vital for meeting compliance requirements. Organizations need to establish proper policy controls and security measures. Discover how ioSENTRIX helps unify, track, control, and secure essential data to ensure compliance with various regulations like HIPAA, PCI DSS, FedRAMP, and more.

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