Compliance is the backbone of any successful business, making sure operations align with the laws and regulations. However, there’s often confusion between legal compliance, which involves adhering to laws applicable to all businesses, and regulatory compliance, which focuses on sector-specific rules. Understanding the key differences between these two types of compliance is crucial for mitigating risks, maintaining credibility, and ensuring smooth business operations.
What is Legal Compliance?
Legal compliance is the process by which a company adheres to the complex rules, policies and procedures that regulate business practices in a particular jurisdiction. Compliance involves knowing and understanding the legislation that applies to the business and demonstrating that the business and its entities comply at all times.
Why is Compliance Important?
Non-compliance puts your company in danger of hurting other people, which can lead to compensation claims and long-term damages to your brand. Directors may face prosecution and possibly jail time as a result of failing to comply with health and safety regulations.
What is Regulatory Compliance?
Regulatory compliance is the process of complying with applicable laws, regulations, policies and procedures, standards, and other rules issued by governments and regulatory bodies. Depending on the industry and jurisdiction, regulations vary significantly. Large businesses with a global footprint need to comply with pertinent laws and regulations in all the countries they operate in and from.
Some industries, such as financial services and IT face numerous and often complex regulations and compliance frameworks due to their impact on the economy, business, and health infrastructure, respectively. Additionally, many of these industries are also at significant risk of cyber breaches due to the increasingly complex and evolving cyberattack surface.
What Are Regulatory Compliance Examples?
Some of the major regulatory compliance examples related to financial sectors include the Sarbanes-Oxley Act, the Health Insurance Portability and Accountability Act (HIPAA), the Payment Card Industry Data Security Standard (PCI DSS), and the Federal Information Security Management Act (FISMA).
What Are the Differences Between Legal Compliance and Regulatory Compliance?
Understanding the key differences between legal and regulatory compliance is critical for businesses striving to maintain ethical operations and avoid potential penalties. Here’s a deeper explanation of the key differences:
Scope and Application
Legal compliance refers to following general laws that are applicable in all fields. Contracts, tax duties, environmental preservation, and human rights are only a few of the many topics that are governed by these laws. Usually passed by the federal, state, or local governments, they are frequently unchanging and may only be altered by official legislative revisions.
Regulatory compliance is more specialised, targeting industry-specific rules and guidelines established by regulatory bodies. These rules are designed to address the unique risks, standards, and ethical considerations within specific sectors, such as finance, healthcare, or telecommunications. For example, a healthcare provider must comply with HIPAA regulations to ensure patient data privacy, while a financial institution must adhere to anti-money laundering standards.
Enforcement Authorities
Legal compliance is overseen by government entities, including courts, police, and public prosecutors. These bodies are responsible for interpreting and enforcing the laws of the land. Businesses found in violation of these laws may face lawsuits, criminal charges, or direct penalties from federal or state agencies.
Regulatory compliance is monitored and enforced by specialized agencies dedicated to upholding standards within their respective domains. These agencies have the authority to audit businesses, impose fines, or revoke operating licenses for non-compliance.
Consequences of Non-Compliance
Violating legal requirements can result in severe penalties, including lawsuits, financial fines, reputational damage, and even imprisonment of individuals involved in the misconduct. The consequences are often public and can lead to long-term damage to a business’s credibility and operations.
Regulatory breaches may not always involve criminal charges but can still lead to significant repercussions. These might include fines, warnings, suspension of operations, or revocation of certifications and licenses. Regulatory violations often require corrective actions to bring the business back into compliance.
Dynamic Nature of Requirements
Laws are often more stable and undergo changes at a slower pace, typically requiring a formal legislative process. This provides businesses with a predictable framework to follow.
Regulatory standards can change quickly in response to technological advancements, market trends, or emerging risks. Industries like finance and cybersecurity frequently require updates to ensure safety and innovation.