In today’s global marketplace, banks have greatly expanded the scope and complexity of their activities. Today, they face an ever changing and increasingly complex regulatory environment, placing a greater emphasis on compliance.

The Basel Committee on Banking Supervision (2005) defines compliance risk as “the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct applicable to its banking activities”.

The compliance breakdown in the downfall of “too big to fail” financial institutions, such as Bear Stearns and Lehman Brothers, has established the degree to which external risk events can create a loss of confidence resulting in lasting reputational damage and impaired shareholder value.

The need to increase banks’ capital and liquidity to levels that would help them weather another financial storm has increased the role of compliance in today’s world, making it more multifaceted. The banking sector faces an overabundance of regulations governing every aspect of their business. In the US, bank regulation is very fragmented, compared to other countries that usually have only one bank regulator. Banking and financial services in the US are monitored at both the Federal and State level.

Depending on the activities of a financial institution, it may be subjected to numerous regulators and regulations. I wouldn’t be surprised if a financial institution is subjected to examination from an authority which possibly was not in the list of “regulators”. This may seem a bit overbearing but the reality is — banks in the UAE have three financial regulators, depending on the banking activities being conducted (UAE Central Bank, Emirates Securities and Commodities Authority and DFSA), in addition to Labour/Immigration laws, Commercial Law, the Telecommunications Regulatory Authority Additionally we have to comply with the laws originating out of the UN, US and the European Union directives which need to be adhered to in cross border banking relationships. Keeping abreast of the new regulations which run into hundreds of pages is the biggest challenge for any compliance professional.

However, irrespective of how cumbersome the regulations may be, they are important to uphold the integrity of the financial system. Failure to comply with regulations can result in significant expense for banks, including the potential for large fines and other penalties, as well as the associated negative impact to the brand and reputation. This is clear from the momentous penalties paid by the large multinational banks, including the whopping $4.3 billion fine on five global banks accused of illegal currency trading.

The cost of compliance is increasing as more and more regulations are enforced., However, banks know that the cost of non-compliance is much greater, not just in monetary terms but also in business efficiency as dealing with compliance issues shifts the focus of the senior management from the core activity of generating business and of course making money for the shareholders.

The regulations governing Islamic banking in the UAE are limited and date from 1985. Recent banking laws have focused on conventional banks, leaving the Islamic banks to implement them according to Sharia principles.

As we progress towards the vision of His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, to make Dubai the capital of the Islamic economy, there will certainly be a need to boost the regulatory framework and have specific laws and regulations governing the Islamic banking industry.

Although Islamic banking has the same purpose as conventional banking, to make profits for the bank and its shareholders, it also has the responsibility of adhering to Islamic law and ensuring that its customers, employees and even the community in general are equitably treated. Improvements and enhancements in the regulations will certainly be a right step in ensuring this, even though they will bring new challenges for both Islamic and conventional banks.

— The writer is the Head of Compliance at Noor Bank