Knowledge and Insights

The banking industry has seen noted changes in income margins for institutions of all sizes over the last five to ten years. Growth strategies focused solely on revenue channels are no longer effective and must be changed to ensure that income is not offset by compliance-related expenses.

The regulatory landscape with which banks need to comply has always been a challenge. Almost every aspect of a bank’s operations requires some form of regulatory oversight, and there are numerous sections within the regulations that are open to interpretation. 2014 brings yet another layer of complexity. The creation of the Consumer Financial Protection Bureau (CFPB) has changed the dynamics of the federal and state regulatory environment, as the CFPB’s primary mission is to protect the consumer from harm and not the bank’s safety and soundness.

The CFPB and shifting regulatory environment have led to more extensive compliance examinations, additional review for indications of harm to the consumer, and larger civil monetary penalties coupled with consumer restitution. Therefore, effective leadership is required to identify changes in regulatory expectation, proactively manage compliance risks, and incorporate compliance management into growth strategies. As your bank focuses on ways to increase revenue through the addition of new products and services, compliance personnel should be involved.

All banks should evaluate their compliance management program to ensure that it sets parameters for (1) how your bank establishes compliance responsibilities; (2) communicates those responsibilities to employee; (3) ensures that responsibilities are carried out and legal requirements are met; (4) takes corrective action; and (5) updates tools, systems and materials as necessary. Monitoring through reviews by the compliance department as well as internal audits are essential to confirm that your compliance management program is working as intended.

Managing compliance costs is critical to all banks as profit margins are very tight. A bank must ensure that proper resources are provided to compliance as it relates to personnel, training, audits, reviews and software. Keep in mind that the cost of non-compliance greatly outpaces the cost to comply.

Strategies to manage compliance costs include implementing a co-sourced compliance management program through which your bank can (1) gain expertise of an outside consultant without salary costs of new employees; (2) proactively plan for upcoming regulatory changes; and (3) implement a proven, comprehensive, and defined compliance management process.

The co-sourced approach allows your bank to utilize current operations staff that may not be familiar with all the intricate details of the deposit and loan compliance regulations. These employees are extremely valuable as they are familiar with the ins and outs of your bank’s policies and operations. The co-sourced structure will assist in training select bank staff so that a transfer of knowledge and skill sets can occur. This approach will enable your bank to properly reduce compliance costs, and mitigate the risk of incurring large non-compliance costs, as regular compliance reviews may identify issues before regulators do.

Contact Salvatore Zerilli at The Mercadien Group for more information on how our compliance advisory and audit services can help your bank.