Policy review

What Is Policy Review?

Policy review is the systematic process of evaluating and updating an organization's established policies and procedures to ensure their continued relevance, effectiveness, and alignment with current objectives, external regulations, and best practices. This crucial component of corporate governance falls under the broader umbrella of internal controls within financial institutions and other regulated entities. The objective of a policy review is to maintain robust operational frameworks, enhance compliance, and mitigate risk management challenges.

History and Origin

The concept of formal policy review has evolved significantly with the increasing complexity of financial markets and the proliferation of regulatory framework. While organizations have always had internal guidelines, the formalized, systematic policy review process gained prominence, particularly in the wake of major financial crises and legislative responses. For instance, the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010 after the Great Recession, dramatically expanded regulatory oversight and necessitated rigorous internal policy frameworks across financial institutions. The act aimed to promote financial stability and protect consumers, mandating increased accountability and transparency within the financial sector⁹, ¹⁰, ¹¹. This legislative shift, among others, compelled entities to adopt more structured approaches to policy management, including regular and thorough policy review cycles.

Key Takeaways

• Policy review is the periodic assessment of an organization's rules and guidelines.
• Its primary goals are to ensure policies remain effective, relevant, and compliant with current laws and regulations.
• It is a vital aspect of corporate governance and an effective internal control system.
• Regular policy review helps identify gaps, redundancies, or outdated provisions, leading to enhanced operational efficiency and reduced risk.
• The process contributes to maintaining public trust and fulfilling obligations to stakeholders.

Interpreting the Policy Review

A successful policy review signifies an organization's commitment to adaptability and continuous improvement. The interpretation of a policy review often focuses on its outcomes: the identified areas for improvement, the proposed revisions, and the subsequent implementation of updated policies. A comprehensive policy review indicates a proactive stance toward regulatory changes and evolving business environments. Conversely, a superficial or infrequent policy review can expose an organization to significant compliance risks, legal liabilities, and operational inefficiencies. It serves as a gauge for how well an entity adheres to its own principles and external legal requirements. Effective interpretation also involves assessing the degree to which employees understand and adhere to the policies under review.

Hypothetical Example

Consider "Horizon Investments," a hypothetical broker-dealers firm. They have a "Client Onboarding Policy" that was last reviewed five years ago. Recent updates to securities laws regarding anti-money laundering (AML) and know-your-customer (KYC) procedures have rendered some aspects of their existing policy outdated.

During their annual policy review cycle, the compliance department initiates a review of this policy. They find that while the policy outlines basic client identification, it lacks specific requirements for enhanced due diligence for high-risk clients and does not explicitly integrate new reporting thresholds for suspicious activities.

As a result of this policy review, the firm revises its "Client Onboarding Policy" to include:

1. Mandatory verification of beneficial ownership for certain entities.
2. A tiered due diligence process based on client risk profiles.
3. Updated procedures for reporting suspicious transactions to the relevant regulatory agencies.

This example demonstrates how a systematic policy review ensures that internal guidelines remain robust and compliant with external mandates.

Practical Applications

Policy review is integral across various sectors, particularly within highly regulated industries. In finance, it is a cornerstone for ensuring adherence to complex rules governing market conduct, investor protection, and financial reporting. For instance, FINRA Rule 3120 mandates that member firms establish and maintain a system of supervisory control policies and procedures that are tested and verified for their reasonable design to achieve compliance with applicable securities laws and regulations, and FINRA rules⁶, ⁷, ⁸. This rule essentially formalizes the need for ongoing policy review within broker-dealers. Beyond finance, policy review is critical in healthcare for patient safety protocols, in manufacturing for quality control, and in technology for data privacy policies. The continuous assessment ensures that documented procedures align with actual practices and evolving standards. A strong policy framework, underpinned by regular policy review, is also essential for implementing effective best practices in data governance within an organization⁴, ⁵.

Limitations and Criticisms

Despite its importance, policy review has limitations. One common criticism is that it can become a bureaucratic exercise, focused more on checking boxes than on genuinely improving organizational effectiveness. If not conducted with sufficient rigor, it may fail to identify actual gaps or risks, leading to a false sense of security. Policies can also become overly prescriptive, stifling innovation and flexibility if not balanced with practical application and ongoing feedback. Moreover, ensuring that updated policies are properly communicated, understood, and consistently implemented across an organization can be challenging. A framework like the OECD Principles of Corporate Governance emphasizes the importance of clear disclosure and transparency, as well as the responsibilities of the board of directors in overseeing governance, implying that policy review must be part of a broader commitment to sound organizational practices, rather than a standalone activity¹, ², ³. Without a culture of genuine adherence and a commitment from senior leadership, even the most well-designed policy review process may not yield its intended benefits.

Policy Review vs. Internal Audit

While both policy review and internal audit are critical components of an organization's control environment and often involve examining policies, their primary objectives and scope differ.

Policy review is a proactive and ongoing process focused on the policies themselves. It involves evaluating whether existing policies are up-to-date, relevant, comprehensive, and effectively support the organization's objectives and regulatory obligations. The output is often a revised policy or the creation of new policies to address identified gaps. It is generally driven by the departments or functions responsible for creating and maintaining those policies, sometimes with oversight from a compliance officer or dedicated governance team.

Internal audit, by contrast, is an independent appraisal function designed to examine and evaluate the adequacy and effectiveness of the organization's governance, risk management, and internal control processes. When it comes to policies, internal audit assesses whether policies are being adhered to in practice, whether they are effectively communicated, and whether the controls outlined within them are functioning as intended. The focus is on verification and assurance regarding the execution of policies and procedures, rather than the intrinsic design of the policies themselves. Internal audit often provides assurance to the board of directors and senior management on the effectiveness of the entire control framework.

FAQs

Why is policy review important for financial firms?

Policy review is essential for financial firms to navigate complex and frequently changing regulatory landscapes, such as those governed by securities laws. It helps ensure ongoing compliance, protects against legal and reputational risks, and maintains investor protection. Without regular review, policies can quickly become outdated, leaving the firm vulnerable.

How often should a policy review be conducted?

The frequency of a policy review depends on several factors, including the criticality of the policy, the rate of change in relevant regulations, and the organization's risk appetite. Many organizations conduct annual reviews for key policies, while others may opt for more frequent reviews (e.g., quarterly or semi-annually) for high-risk areas or those subject to rapid regulatory shifts. Major legislative changes often trigger immediate reviews.

Who is typically responsible for conducting a policy review?

Responsibility for a policy review often lies with the department or individual accountable for the policy's subject matter. For example, the human resources department reviews HR policies, while the compliance department reviews regulatory policies. Oversight and coordination are often provided by a central governance committee, a chief compliance officer, or an internal audit function to ensure consistency and thoroughness across the organization.