ASK MAT: Compliance and Control Testing protocols – as CO, I’m not familiar with the difference; could you help?

ASK MAT: Compliance and Control Testing protocols – as CO, I’m not familiar with the difference; could you help?

MAT SAYS:

• Thank you for such a great question, and there are two essential pillars of a robust risk and governance framework: Compliance Testing and Control Testing.
• While they may sound similar, they serve distinct purposes and are often misused or confused with each other.
• Unfortunately, many firms place more emphasis on compliance testing because of regulatory risk rather than considering control effectiveness issues

Key Differences at a Glance

I'll aim below to clarify the differences, highlight their importance, and explore how financial institutions can leverage both to strengthen their compliance posture.

What Is Compliance Testing?

Compliance Testing is the process of evaluating whether a financial institution adheres to applicable laws, regulations, and internal policies. The compliance function typically conducts it and focuses on regulatory requirements such as:

• Treating customers fairly
• Solvency rules
• AML/CTF/CPF - Know Your Customer (KYC)
• Data privacy regulations
• Cyber regs
• ETC. ETC

Key Objectives:

• Ensure regulatory obligations are met
• Identify gaps in adherence to laws and policies
• Assure regulators and senior management
• Support remediation and continuous improvement

Example:

Testing whether customer disclosures required under REG Z OR CODE Y were provided accurately and on time across a sample of customer files.

WHAT IS CONTROL TESTING?

Control Testing, on the other hand, assesses the design and operating effectiveness of internal controls that support business processes and risk mitigation. It is often performed by internal audit or risk management teams and focuses on whether controls are functioning as intended.

Key Objectives:

• Validate the effectiveness of controls in preventing or detecting errors, fraud, or non-compliance
• Support financial reporting accuracy
• Strengthen operational resilience
• Assure risk management frameworks

Example:

Testing whether system access controls are correctly configured to prevent unauthorised access to sensitive financial data.

Why Both Matter in Financial Services

In regulated financial services companies, both testing types are critical:

• Compliance Testing ensures the institution is not exposed to regulatory penalties or reputational damage.
• Control Testing ensures that the systems and processes in place are robust enough to prevent issues before they occur.

Together, they form a complementary framework that supports the "three lines of defence" model—business units, risk/compliance, and internal audit.

The Rise of Automation and Continuous Monitoring

With increasing regulatory complexity and resource constraints, many institutions are turning to automated testing platforms to address these challenges.

Technologies like Control Test Automation (CTA) enable real-time monitoring of controls and compliance across entire data populations—not just samples[1].

This shift allows for:

• Continuous assurance
• Reduced manual effort
• Faster identification of issues
• Enhanced audit trails

Best Practices for Implementation

1. Define Clear Ownership: Ensure roles and responsibilities are well-defined across compliance, risk, and audit functions.
2. Integrate Testing into Governance: Align testing outcomes with enterprise risk management and board reporting.
3. Leverage Technology: Use automation to scale testing and improve accuracy.
4. Focus on High-Risk Areas: Prioritise testing where regulatory or operational risk is highest.
5. Document and Remediate: Maintain thorough records and ensure timely remediation of findings.

Conclusion

In a world of increasing regulatory scrutiny, financial institutions must go beyond checkbox compliance. By understanding and effectively deploying both Compliance Testing and Control Testing, firms can build a resilient, transparent, and trustworthy operation that not only meets regulatory expectations but also drives long-term value.