Banking regulations and the methods for ensuring compliance are not new. They have been with us since the first merchant banks emerged. The regulations were initially designed to maintain consistency across transactions and were expanded during the Great Depression to support safety and soundness within the banking industry. More recently, the emphasis has been on consumer protection and the resulting regulations are complex and sometimes vague. They were also costly and time consuming in terms of personnel and technology. Regulation components were imposed without being insufficiently researched, and they created downstream impacts on consumers and perpetuate the cycle of consumer mistrust of the banking sector, which engenders even more regulations, also called the “Regulatory Olympics.”
Lest we forget, banks operate as for profit entities. Most of us have our retirement assets tied up with banks. We can only imagine the howling if profits decline. For these reasons, banks are forced to serve competing masters: regulators AND profit margins. In an attempt to maintain those profit margins, many formerly free services have gone by the wayside in favor of fee for service, further straining the resources of the very consumers’ regulators were trying to protect. Now the regulators are eying the SME industry looking to “protect” a new group; the entrepreneurs.
Small businesses contribute up to half of any country’s GDP and create the vast majority of all net new jobs. Governments recognize the contributions of small businesses to economic growth and are making efforts to support small businesses. As an outgrowth of this focus, regulatory agencies are turning their attention to the small business arena as the next regulatory frontier. This is seen as a logical extension of consumer protection as the vast majority of small businesses are single owner or limited partnerships, with finances co-mingled across obligations.
Bankers have learned to approach compliance in a systematic fashion:
1. Identify all regulations applicable to the organization. This will depend on market area, product type (i.e., mortgage and commercial real estate may have different compliance and documentation requirements compared to credit card) and function (i.e., use of personal information in marketing, model management). Secure your compliance and legal council regarding how your organization should respond.
2. Identify all relevant data and related gaps. Small business owners have fiscal obligations as businesses, as business owners and as consumers. Is the organization able to merge all obligations at an entity level? There is added complexity when there are multiple owners. Data diagnostics can point to weaknesses in missing elements, values that are illogical, timeliness, consistency, and completeness issues. These needed to be corrected or conclusions drawn from your analytics will be erroneous and put you at risk for non-compliance.
3. Define what analyses must be undertaken and how frequently. Compare your choice of analytics to industry best practices. Automate this process as much as possible.
4. Start by executing on the basics. These are fundamental regulations that are generally in place regardless of country and can include things like privacy, fair lending, information security, fraud, collections activities, capital allocation, and model management. Once the basics are covered, you will have the discipline in place to begin tackling the requirements for your specific market (i.e., country specific marketing prohibitions, scenario stress testing for CCAR).
5. Document, document, document. If it wasn’t documented, regulators assume it wasn’t done. If your process can only be implemented across a period of time, specify the plan you will undertake to get to complete compliance.
6. Where possible, consumer specific regulations should be applied to small business. Regulatory software and documentation tools used on consumer portfolios can often be leveraged for small business portfolios. Ultimately, compliance is a disciplined practice. Regulators need to understand the bank’s data and decision strategies, the whys and wherefores of any activities, and the resulting outcomes against the original decisions.
For resources on Small Business Lending Regulations, you may find these useful:
If you really want to level up your skills as a small business lender, you owe it to yourself to check out these courses: