United States: You Need A Written Compliance Program

One of the most common criticisms from regulators in recent compliance examinations has been a bank's lack of a written Compliance Program. One of the most common requirements in recent regulatory enforcement actions has been the development and submission of such a written program. The past seven year period of turmoil in banking brought about the advent of a greatly increased regulatory scrutiny for banks. During this time, the FDIC, the OCC, the Federal Reserve and the CFPB have each changed their view of how financial institutions should approach the subject of regulatory compliance, especially for consumer protection laws and regulations.

The risks to banks that the regulators are concerned about have not changed. Regulators still believe that poor compliance practices increase a bank's reputational risk, legal risk, and compliance risk. What has changed is the regulators' focus on what to do about these risks.

In the past, examiners reviewed files and examined the bank's policies and procedures for each of the regulations that make up the framework of compliance. If files were complete and accurate and policies and procedures were in place for each law and regulation, the chances were very good that a bank would have a favorable compliance exam.

THE COMPLIANCE MANAGEMENT SYSTEM.

Today, however, the regulatory mindset has changed. Regulators, too, are overwhelmed by the pace and complexity of regulatory developments, particularly in the consumer protection arena. They no longer believe that a disjointed series of more or less stand-alone policies and procedures can produce a sound program of compliance. Instead, they are examining the process that banks employ to create a unified, cohesive culture of compliance, one that approaches compliance as a holistic set of principles that crosses department lines, organizational structure, all products and services offered, and provides training for the staff and management of the bank. Examiners sometimes refer to this as a bank's Compliance Management System (CMS), a topic we have talked about before.

Examiners now want to understand how a bank approaches the broad subject of compliance. How do you learn about the numerous changes and developments in compliance? Is there a central authority over the compliance function at your bank and does that person (or persons) have the necessary authority, training and resources to manage the Compliance Program across departmental lines?

REGULATORY EXPECTATIONS.

Examiners also believe that a bank's Compliance Program cannot function properly if Senior Management and the Board of Directors are not fully engaged in the compliance process. So, as a result, they now begin their examination of a bank's Compliance Program by inquiring at the top.

The regulators' clear expectation of the Board of Directors is that the Board will have in place three basic elements.

  • Strong oversight of the compliance function by the Board and Management;
  • The development and implementation of a strong and efficient Compliance Program; and
  • The development of a thorough compliance audit function.

THE WRITTEN COMPLIANCE PROGRAM.

Combine these three elements with a clear process for tracking regulatory developments, a full set of accurate and complete policies and procedures, and a strong program for training all affected staff, and you will be well on your way to convincing examiners that your bank has a strong Compliance Management System. But that only starts the process. Examiners now want to see a written Compliance Program.

Of course, this requirement is imposed most often in the context of a Formal Agreement, Consent Order, MOU or some other less formal enforcement action. And perhaps the best way to head off one of these actions is to plan in advance to develop your own voluntary written Compliance Program without waiting for the regulators to ask.

THE ELEMENTS.

The written Compliance Program should be viewed as a complement to the bank's Compliance Management System. The CMS basically establishes how the bank, through its Management and Board of Directors, implements a culture of compliance where a top-down approach supports the compliance function. The written Compliance Program can be viewed as a blueprint for how compliance works at your bank. The following are the most important elements of a written Compliance Program.

  • Compliance Risk Assessment. The Compliance Officer is usually the driving force behind the written Compliance Program. Having been appointed and sufficiently empowered by Management and the Board of Directors, the Compliance Officer should be charged with developing a Compliance Program that is suitable to the bank based on its size, product offerings, office locations, staffing, etc. (The Compliance Risk Assessment furnished to those banks taking part in the CMS Initiative should be a help here.)
  • Monitoring for Compliance. Next, the written Compliance Program should provide for a written explanation of the methods that the Compliance Officer and support staff will use to perform an internal audit of loan transactions, products and services, etc. for compliance with all laws and regulations. Particular emphasis should be placed upon consumer protection laws and regulations. For a smaller bank, this monitoring process could be as simple as a review of all loan transactions for compliance and a sampling of deposit account and other product offerings. A larger bank may need to develop a sound sampling technique designed to detect any recurring errors or other problems. Note: This internal audit function is in addition to any independent, third-party testing that may need to take place. Recent experience tells us that internal monitoring may be something of a weak link for banks of all sizes.
  • Policies and Procedures. In the past, a bank's Compliance Policy Manual was the document you would turn to when asked about your bank's compliance plan or program. Regulatory guidance still emphasizes the need for thorough, up-to-date policies and procedures; however, today the focus increasingly is upon the manner in which your Compliance Policy is updated for new developments and changes and then upon how those developments and changes are communicated to Management, the Board of Directors and throughout the bank's affected staff. What would otherwise be a difficult task to tackle should become easier as a result of membership in the MRCG or MSRCG. The combination of newsletters, Quarterly Meetings and regular updates to the Compliance Manual that every member receives should go a long way towards satisfying the regulators that you have this part covered. Don't forget to include the Executive Summary of the Newsletter that is provided to Management and to the Board. Many examiners are already familiar with this service. Be sure to make it a part of your written Compliance Program.
  • Consumer Complaints. When the CFPB started tracking consumer complaints in 2012, that caught the attention of the bank regulators. Now the regulators are asking to see policies for tracking consumer complaints of all types and evidence of how those complaints are resolved. Increasingly, this complaint tracking/resolution process is becoming part of a bank's written Compliance Program. Your plan should spell out those processes and be comprehensive enough to serve as an early warning system if repetitious complaints are received.
  • Training. Training has always been a requirement that the regulators have stressed. Your written Compliance Program should detail how training will be conducted for new legislation, regulations or developments and how and when it will be conducted (annually, as needed, based on a planned schedule, etc.). Copies of training materials should be kept as a part of the written Compliance Program, along with a record of employee, Management and Board of Directors attendance.
  • Independent Review. For a number of years now, the regulators have required a certain amount of independent testing for certain compliance functions, think BSA. As the regulators' jobs have become more time consuming and complex, they have welcomed, and in the case of enforcement actions required, independent testing of more and more facets of compliance. Independent testing does not have to be conducted by an outside third-party, although third-party testing is often more efficient than having someone at the bank who is not involved in compliance do the testing in order to be independent. Either way, a benefit of independent testing can be that the regulators accept the work papers and results of such testing and cut short what would otherwise be an extended and expensive Compliance

Examination. Of course, that presumes that the independent testing results are good. However, if the independent testing reveals a problem, then you would have time to take corrective action thereby lessening or perhaps alleviating what would otherwise be an examination problem. Independent testing and how it will be employed should be a part of your written Compliance Program.

CONCLUSION.

In conclusion, then, none of this is new. Your bank probably has many if not all of these features in place. But ask yourself whether you have reduced this to writing. Whether Management understands and has signed on, and, finally, whether the Board of Directors supports each of the elements of your written Compliance Program. If all of that is true, then you have a concise document that can be used to explain to regulators how compliance works at your bank.

For those taking part in the CMS Initiative, we are drafting a generic written Compliance Program that can be used as a starting point for developing your own written statement. That generic Compliance Program should be posted in time for the November 2014 meeting.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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