ComplianceMay 29, 2020

Banking survey: Concerns persist in effectively managing risk, compliance issues

Timothy R. Burniston, Senior Advisor, Regulatory Strategy for Wolters Kluwer’s Compliance Solutions business, presents an overview of the key results of the seventh Wolters Kluwer® Regulatory & Risk Management Indicator survey which provides insights, measurements, and validation of the major risk and compliance issues challenging U.S. banks, credit unions, and other lenders.

(As published in Scotsman Guide, Residential Edition, March 2020 issue)

Now in its seventh year, the Wolters Kluwer Regulatory & Risk Management Indicator survey provides insights, measurements and validation of the major risk and compliance issues challenging U.S. banks, credit unions and other lenders. The survey results also help us further hone and refine the products and services we bring to market to assist financial institutions in better managing their risk and regulatory responsibilities.

Our latest survey findings, issued in December 2019, aggregate the views of more than 700 respondents ranging from bank directors and senior executives, to compliance and risk professionals who manage these issues on a constant basis.

Responses reveal that concerns about regulatory compliance and risk management remain high in several key areas for U.S. lenders. The Main Indicator Score of 95 reflected a 10-point increase over the 2018 survey score, and was influenced by, among other issues, concerns about the impact of Home Mortgage Disclosure Act (HMDA) rules; cybersecurity, credit and compliance risks; and an increased level of regulatory agency fines.

The Main Indicator Score is calculated from data regarding several factors, including three “environmental factors” representing the number of new federal regulations, the number of enforcement actions, and the total dollar amount of fines imposed on banks and credit unions over the preceding 12 months, together with seven other indices reflecting input provided by survey respondents. Of the three environmental factor indices, decreases in the total number of new regulations and enforcement actions from the prior year’s results were offset by a higher level of fines imposed by regulatory agencies for the 2019 survey review period.

Concerns about managing HMDA obligations jumped significantly among reporters–from 21 percent in 2018 to 35 percent in 2019–particularly relating to their ability to analyze newly collected HMDA data. Concerns about reporting those expanded data to regulators increased significantly–from 15 percent in 2018 to 40 percent in 2019. Concerns about training staff to manage HMDA data also jumped, from 31 percent in 2018 to 44 percent in the current survey.

From a risk management perspective, cybersecurity continued to rank as the top risk with 78 percent of respondents anticipating it will receive escalated priority over the next 12 months, followed by compliance risk at 47 percent and credit risk at 45 percent of respondents ranking them as a seven or higher.

Responses regarding the level of concern about compliance and risk overall trended positively, but at the same time remained relatively high. Respondents indicated more confidence in their ability to maintain compliance, keep track of changing regulations, and demonstrate compliance to regulators, with results reaching their highest confidence levels in the survey’s seven years. However, more than 50 percent of respondents still characterized their overall concern levels as a “7 or higher” on a scale of 1 to 10, reinforcing the reality that regulatory compliance and risk management issues continue to pose significant challenges.

With regard to implementing effective compliance management systems, respondents scored the use of manual rather than automated compliance processes as their top obstacle. Despite this level of concern, only 26 percent believe their institution will increase investment in automation in the coming year, and nearly half (49 percent) do not expect their institutions to increase their automation investments. Inadequate staffing was the second-most reported obstacle (45 percent) to implementing an effective compliance program. Respondents (44 percent) also reported having too many competing business priorities as a major impediment to implementing an effective compliance program.

The survey also asked respondents to gauge the perceived level of fair lending examination scrutiny. Twenty-eight percent of respondents indicated they noticed a “slight increase” in fair lending exam scrutiny from the previous year (4 percent more than in 2018) but only 13 percent said they noticed a “considerable increase” in exam scrutiny, compared with 19 percent last year. The responses include commentary expressing that maintaining compliance with fair lending regulations and proving compliance to regulators often seems to be a moving target.

Looking ahead

The survey results bring a formidable range of pressing risk and regulatory compliance challenges into clear focus for 2020. Topping the list, regardless of institution size, is the challenge of managing and implementing regulatory requirements applicable to residential mortgage regulations.

Other key issues cited include keeping current with changing regulations; complying with the forthcoming Current Expected Credit Loss (CECL) accounting standards; deposit account regulations; and compliance program management. Respondents also expressed a high level of concern about their ability to stay on top of  BSA/AML requirements, fair lending laws and regulations, UDAAP standards, new URLA forms and, to a slightly lesser degree, state regulatory requirements.

Looking forward, economic factors that institutions are monitoring as potential concerns include interest rate fluctuations (87 percent), data privacy issues (85 percent), and recession fears (76 percent). Only 22 percent of respondents view regulatory relief over the next two years as either very likely (three percent) or somewhat likely (19 percent), a drop from 48 percent who viewed regulatory relief as very likely (15 percent) or somewhat likely (23 percent) in the 2018 survey.

Despite discussion during the past several years about deregulatory actions, the survey results show very little expectation for a “lighter touch” by regulators. Respondents for the most part do not expect to see a measurable reduction in regulatory burden, with only three percent indicating they noticed a decline in examination scrutiny and 43 percent noticing no change, a six percent increase from 2018’s responses.

When asked about enhancing elements of their compliance management systems, 48 percent of respondents anticipate higher future investments in strengthening their risk assessment capabilities, followed by updating compliance policies and procedures (47 percent), and expanding compliance control testing processes (43 percent).

While the recent pace of new regulations has slowed significantly compared to the years immediately following the passage of Dodd-Frank Act, the amount of work required to effectively manage compliance and risk responsibilities has not declined. Clearly, there are continuing demands on compliance professionals to help keep their institutions compliant, and to address the tremendous range of regulatory and risk management issues impacting their organizations.

Timothy Burniston
Senior Advisor, Regulatory Strategy

Timothy R. Burniston joined Wolters Kluwer in December 2011 to lead the company’s Risk and Compliance consulting practice. Under his leadership, the practice grew significantly in scope and now enjoys a national reputation for excellence.