Financial Service Compliance: What You Need to Know
Banks and other financial organizations spend a significant amount of time and resources to remain compliant. In addition, the 2008 financial crisis intensified the speed with which laws and regulations evolve to encourage transparency, stability, and integrity in how the financial sector conducts business. However, with multiple regulatory agencies and rapidly changing laws that require companies and institutions of all sizes to overhaul entire systems, staying compliant is easier said than done.
What Does it Mean to Be Financially Compliant?
For banks and financial institutions, compliance requires adhering to state and federal laws and regulations. Some examples of entities affected by financial service compliance include banks, lenders, savings institutions, investment companies, brokerage firms, mortgage companies, correspondent lenders, brokers, and insurance companies.
Financial services compliance is complicated and covers a broad range of issues. If institutions don't get it right, violations can lead to lawsuits, regulatory fines, reputational harm, or even license or charter revocation. Unfortunately, it's difficult to recover from reputational harm, and the cost of penalties and remediation efforts alone often far exceeds the money and resources used on proactive compliance efforts.
Is Your Institution Compliant?
It takes significant time and effort to stay compliant. Many companies only address compliance issues when problems arise. Other companies spend significant resources to hire experts in financial laws and regulations to ensure they remain compliant and avoid enforcement actions and fines. It typically requires a team of people to ensure that your institution is compliant due to the complexities of the laws, regulations, and the speed with which they change. Even with all that proactive time and effort, financial institutions may still not be fully compliant, especially as more services become remote and the industry adjusts to keep up.
What Organizations and Institutions Oversee Compliance?
Six leading regulatory agencies oversee the majority of financial institutions in the United States. The federal banking regulators in the U.S. include the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). They are collectively referred to as prudential regulators. They oversee the safety and soundness of banking institutions to ensure they maintain profitability and avoid failure. In addition to these agencies, there are state and local agencies that manage compliance at applicable institutions.
The Federal Deposit Insurance Corporation (FDIC)
The FDIC provides deposit insurance for its member banks. They directly supervise and examine more than 5,000 banks and savings associations for safety and soundness. The FDIC also examines banks' compliance with consumer protection and deposit operations laws like the Truth in Lending Act, the Fair Debt Collection Practices Act, and the Bank Secrecy Act. The FDIC also manages and resolves bank failures.
The Federal Reserve Board (FRB)
The FRB or "Fed" is the central bank of the United States. The FRB's primary responsibilities are to create a stable economy by influencing money and credit conditions in the economy and containing systemic risks in financial markets. They also ensure state-chartered banks and savings institutions maintain compliance through regulation of Fed member banks (banks that hold reserve deposits in Federal Reserve Banks).
Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) is an agency that oversees and regulates the United States securities market and protects investors. The SEC focuses on the protection of investors from fraudulent and manipulative activity and enforces federal securities law. In addition, the SEC requires non-exempt financial institutions that plan to offer, buy, or sell securities, to register with them before they begin operating.
The Office of the Comptroller of the Currency (OCC)
The Office of the Comptroller of the Currency (OCC) charters, regulates and supervises all national banks and federal savings associations, and federal branches and agencies of foreign banks. The OCC supervises and examines its chartered banks for compliance with certain consumer protection laws and safety and soundness in their operations. They promote stability and transparency of the banking system in the United States. The OCC is an independent bureau within the Department of Treasury.
The Consumer Financial Protection Bureau (CFPB)
The Consumer Financial Protection Bureau (CFPB) helps educate consumers and empowers them to use available financial services and products. The CFPB has supervisory authority over banks, thrifts, and credit unions with assets over $10 billion and their affiliates. They also supervise nonbank mortgage originators and servicers, payday lenders, and private student lenders of all sizes. It also handles consumer complaints and community affairs.
The Commodity Futures Trading Commission (CFTC)
The Commodity Futures Trading Commission (CFTC) regulates the U.S. derivatives markets, including futures, swaps, and certain kinds of options. It also serves to protect the market and traders from manipulation and fraudulent activity. In addition, the CFTC protects customers' interests by keeping an eye on advisors and asset managers responsible for acting in the best interests of their clients.
Top Compliance Concerns
With so many laws and regulatory agencies, understanding compliance can quickly become overwhelming. While there are several compliance concerns, the four listed below are some of the most important due to recent changes in law, consumer perception, and the cost of regulatory fines.
Fraud and Financial Crime
While fraud is an ongoing concern for any business in the financial services industry, the focus has shifted to new laws regarding money laundering. These regulations will likely increase in number, be closely watched, and be heavily enforced. With the creation of new financial services products and changes occurring to existing products, new consumer protection rulemaking is happening, and more is on the horizon.
Privacy & Cybersecurity
Due to the proliferation of online services, privacy issues have become a major concern among financial institutions and lawmakers. Numerous states have recently passed enhanced privacy and data security protections for consumers, adding additional complexity to the already complex regulatory examination and enforcement process. New federal rulemaking concerning privacy and cybersecurity is also expected.
Consumer Compliance
Financial services institutions continue to face new challenges from enhanced regulatory scrutiny and the increasing cost of maintaining compliance. New laws and consumer protections continue to be enacted, requiring additional time and resources to implement and maintain. In addition, financial services institutions should anticipate increasing compliance enforcement, focusing on large institutions, loan servicing, and payments.
Fair Lending
The Biden administration is focused on Fair Housing and Fair Lending, and the CFPB has indicated that racial equality is an immediate priority for the CFPB. Financial services institutions can expect increased regulatory scrutiny, enforcement, and reform to ensure such institutions are not discriminating against applicants based on race or other factors. Enforcement actions stemming from fair lending violations can be severe, costly, and cause irreparable reputational damage.
Ensuring Compliance
If a financial services institution fails to meet compliance standards based on the regulations applicable to its business, the costs start to add up quickly. The costs can be related to business disruption, loss of productivity, loss of revenue, reputational risk, and the unpredictable costs of imposed fines, penalties, and settlements. By remaining in compliance, an institution encourages trust, increases brand loyalty, and may significantly boost its bottom line. One of the best ways to achieve and maintain compliance is to hire the right people with the proper experience and utilize a dynamic regtech solution, like Winnow.
If you're concerned about whether your business is compliant, worried about maintaining compliance, or perhaps starting a new business or offering a new product, Winnow can help. Our automated regulatory compliance platform generates tailored and accurate state and federal regulatory surveys specific to your unique business needs. Schedule a demo today to learn more.
© 2023 Winnow Solutions, LLC. Winnow®, Orrick®, and the Winnow and Orrick logo designs are service marks of Orrick Herrington & Sutcliffe LLP and are used under license from Orrick Herrington & Sutcliffe LLP. IMPORTANT: Winnow is a software product offered by Winnow Solutions, LLC, which is not engaged in the practice of law. Winnow is not legal advice or a substitute for legal advice from a licensed attorney. The purchase or use of Winnow does not establish attorney-client relationships with or protections from Winnow Solutions, LLC or Orrick Herrington & Sutcliffe LLP.