Banks and financial institutions are faced with complex arrays of regulations emanating from regulatory bodies that were created mostly as a result of either financial crises or abuses of the systems through different times. Although these regulatory bodies serve different purposes, their ultimate common goal is to establish safeguards that serve as guidelines towards orderly operations, transparency within vehicles for growth, clear communications, solid risk controls that elicit stakeholders, public, and governments trust. Successfully complying with regulations requires a clear understanding of where each financial institution stands and what regulations specifically might or might not apply. Failing compliance can bring steep financial, reputational, legal, and human consequences that would reflect in an institution’s steady success or a bumpy road towards achieving expected goals.
Regulatory bodies governing financial institutions are International or specific to a given country. International regulators are created by member countries, and their guidelines are agreed upon by the member countries. In some instances, designated institutions within each geographical locality enforce compliance. An example is the Basel Committee of Banking Supervision, better known as Basel. Created after the financial crisis of 2008, all regulatory bodies in each country agreed to the global guidelines. However, each country’s regulatory body would establish the framework tailored to the specifics and internal regulations of each country. As an example, in the US the regulatory body in charge of enforcing compliance with Basel is the Federal Reserve Bank, FRB, in the UK is the Prudential Regulatory Authority, PRA, in Canada is the Office of the Superintendent of Financial Institutions, OSFI, in Singapore is the Monetary Authority of Singapore, MAS. In other instances, aligning to governing guidelines can determine the status of operational reputation to facilitate success in business. An example of these is the Financial Accounting Standards Board (FASB). This board dictates best accounting practices to which all public or private institutions abide. Auditors and accounting certifiers based their judgment on whether companies follow these best practices when publishing their financial results.
Within the United States, there are institutions like the Office of the Controller of the Currency, OCC, Financial Industry Regulatory Authority, FINRA, Federal Deposit Insurance Corporation, FDIC, Commodity Futures Trading Commission, CFTC. These institutions command strong power to compel financial institutions to comply with their regulations. Likewise, there are similar regulatory institutions in other countries.
To enforce compliance with the rules, regulatory bodies conduct periodic reviews, require periodic reports from the institutions, or sometimes maintain an office within the institutions. Failure to comply with rules or guidelines would lead to issuance of warning statements called “Matters Requiring Attention” or MRA or Matters Requiring Immediate Attention” or MRIA. If these warnings are not heeded, the regulators can impose fines, disclose the situation to the public, and or ultimately restrict activities at the institution.
The impact of the charges mentioned above has potentially a wide range of consequences such as disruption of operations, reputational losses, resources drop in morale and drop in market value in addition to market share.
Complexities of compliance
Compliance with all regulations, local and international, constitute a clear challenge for finance institutions. Institutions have tried to respond, with different degrees of success, by implementing “transformation” programs that include innovations in their IT networks, introducing cutting edge technology, and streamlining their operational frameworks moving from silo operations into coordinated strategies to produce distinct reports and achieve timely and simultaneous compliance with regulatory demands.
Institutions are increasingly using artificial intelligence to streamline and increase effectiveness in handling data be it from credit analysis, tracking, and collection, market risk early detection, trend analysis, and better algorithm output or data reliance for controls regarding crime detection (such as AML). These institutions seek to improve their competitive edge through improved use of their systems. A clearer view of their data interaction is to increase transparency strengthening compliance capabilities and improving regulators trust in institutions’ reports.
Challenges
Despite advancements, financial institutions face significant challenges in compliance. International regulations add to the challenge especially for global organizations. Rapidly evolving regulations, technological integration, and the need for real-time data processing create strain. In this case, the best route for organizations is to take a deep look at their systems to determine whether “patching up” is more cost advantageous than undergoing a good refurbishing to their systems (transformation). Doing patch ups could be a quick and easy solution, however, in the long run undertaking transformation efforts pays off by attaining improved communications, elimination of redundancies that translates into clear and comprehensive data which leads to improved accuracy of regulatory reports, and allows for more intelligent management/governance decisions to take the organization to the next level, creating wealth for all stakeholders involved. Additionally, the pressure to maintain transparency while safeguarding sensitive information complicates matters. Institutions must balance innovation with rigorous compliance to ensure sustained success.
