What Is the Difference Between Compliance and Risk Management?

While compliance and risk management are often looked after within businesses by the same group of people, the two functions serve different roles within any organisation. Identifying the key differences will assist in avoiding blind spots and enable sounder decisions.

What is compliance?

Compliance relates to the laws, regulations, industry standards and internal policies that must be adhered to by your business, together with the evidence to confirm compliance. Typically, written policies and procedures, training records, audits and clear documentation are used to demonstrate compliance.

Compliance is important because it helps build trust with customers, staff, investors and regulators alike. Non-compliance could result in fines, legal action and reputational damage. For many organisations, non-compliance with the rules can even result in a loss of contracts or trading rights in specific areas.

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What is risk management?

Risk management refers to the identification of uncertainties, the assessment of their impact on the objectives of a company and the response to them. Uncertainties can be of a negative nature (e.g. a supplier not meeting its commitments, a cyber attack) as well as of a positive nature (e.g. a new market opening up).

Good risk management supports better decisions. It helps a business to understand potential problems, their likelihood and the potential effects and what to do about them, and thus continue to move towards its goals even when things are not clear.

How do compliance and risk management differ?

Compliance covers the known obligations of the business: the rules it must follow. Risk management covers a broader range of current and emerging threats and opportunities, many of which will have no rules associated with them.

There is a natural overlap between compliance and risk management. Not complying with a law is a risk, and risk assessments are used to identify areas where new compliance controls are needed. Many organisations manage these two areas together but with clear differentiation between them.

What are the core components of compliance?

Compliance covers many areas, depending on the business and sector. Common ones include data protection and privacy, including GDPR, financial reporting, health and safety, employment law, cyber security and anti-bribery and corruption.

A strong compliance programme usually includes:

• Clear policies that set out what is expected.
• Training and awareness so staff know what the rules mean for their role.
• Regular audits and checks to confirm policies are followed.
• Risk assessments to spot where compliance is weakest.
• A way to report concerns and a process for putting problems right.

Frequently asked questions

Does a small business need a compliance function?

Just because a company has obligations doesn’t mean it has to have a special team. For a small business, compliance is often part of a manager’s job and can be supported by an accountant, HR adviser or online training. Someone just has to be clearly responsible for it and for writing down the obligations and then checking them.

What is a risk register?

A risk register is a simple list of the main risks your business could face. You assess the likelihood and impact of each risk, state who is responsible and what action you are taking. Regular review of the risk register means risk management is an ongoing process and not a one-off activity.

Where to go next

Cyber security is one of the biggest risk and compliance areas for most businesses. Read our checklist for new starters and cyber security.