Wolters Kluwer Indicator Survey Points to Increased Compliance and Risk Management Concerns at US Banks

Regulatory compliance and risk management concerns are on the rise according to Wolters Kluwer’s annual Regulatory and Risk Management Indicator survey of U.S. banks and credit unions. While concerns over several specific challenges such as fair lending exam scrutiny and new Home Mortgage Disclosure Act rules remained high, other compliance-related factors—including the ability to track, maintain and report to regulators—remained steady or declined slightly. The Indicator survey was sent to banks and credit union nationwide earlier this fall and generated 608 responses.

Overall, risk management concerns jumped by 13 percent over the 2016 Indicator results. Cybersecurity and data security led the list of top risks that respondents anticipated giving escalated priority to in 2018, with an 83 percent ranking of “concerned” or “very concerned,” followed by IT risk (54 percent) and regulatory risk (50 percent). These responses echo and underscore recent statements from senior federal bank regulatory officials about burgeoning cybersecurity risks.

When asked about the likelihood of a measurable reduction in regulatory burden anticipated over the next couple years, 69 percent responded that such relief was “not likely.” Efforts in implementing risk management programs remained relatively steady, with modest progress in those characterizing their organization’s efforts as having either an integrated, strategic risk management program (37 percent) or a well-defined but not enterprise-wide implemented program (33 percent) versus those in the early stages of program development (22 percent).

“These results—compiled against a backdrop of highly publicized data breaches at well-known entities, and at a time when financial institutions are preparing for the implementation of the most significant set of HMDA changes in several decades—drove the increase in concerns expressed in this year’s survey,” said Timothy R. Burniston, Senior Advisor and Principal Regulatory Strategist at Wolters Kluwer.

Respondents expressed concern about optimizing their organization’s compliance costs (78 percent), reducing exposure to financial crime (72 percent), and managing compliance monitoring and testing (73 percent). In a free-text response question, the Home Mortgage Disclosure Act rules going into effect January 1, 2018 were cited as the single biggest compliance challenge.

Regulatory examiners’ scrutiny of fair lending programs was seen as a growing pain point, jumping five percent over the prior year’s survey, with 46 percent of respondents noticing either a considerable or slight increase in scrutiny based on their institution’s most recent exam.

Respondents also cited a multitude of obstacles to managing an effective compliance program, led by “inadequate staffing” (46 percent), “manual rather than automated processes,” (39 percent), and “too many competing priorities” (34 percent).

“These responses, when viewed collectively, reinforce for financial institutions the strategic imperative of having a proactive, well-staffed and supported corporate compliance program that operates across the three lines of defense —the business units, along with compliance/risk and audit areas—in tandem with an overarching risk management framework integrated with all lines of business,” said Burniston.

Wolters Kluwer’s Finance, Risk & Reporting business also recently released a survey which revealed global banks’ desire for an integrated and consistent view of data across the business. The survey revealed that reveals approximately 90% of banks point to having major concerns about data management in today’s constantly evolving regulatory landscape.

Worryingly, just 17% of respondents claimed to have the right systems and procedures in place to support their regulatory compliance efforts. The remaining 83% said that were planning to work on achieving suitably robust systems and procedures in light of mounting global regulatory challenges.

While approximately 42% of respondents cited creating an integrated and consistent view of data across the business as their main challenge, just 3% cited the disruption of FinTech start-ups as a concern. Other noted challenges were keeping up-to-date with the pace of regulatory change (19%), keeping to respective regulatory deadlines (20%) and providing more detailed and granular data to the regulator and senior management (16%).

Tellingly, almost 70% of respondents suggested they have grievances with multiple legacy products comprising multiple technologies and inflexible technology support.

When it comes to detailing which regulatory initiatives will have the most resources devoted to them in 2018, there was a clear winner in the International Financial Reporting Standard (IFRS) 9 and 16 and the Current Expected Credit Loss (CECL) standard. Almost half of respondents cited these upcoming financial standards as having pride of place for IT resourcing. Other notable projects include technology implementations around the Fundamental Review of the Trading Book (FRTB) (12%), Liquidity Risk Reporting (9%), AnaCredit (6%) and Interest Rate Risk in the Banking Book (IRRBB) (3%). The remaining 20% said they plan to devote most resources to local regulatory changes.