Managing Regulatory Change: The Top Compliance Challenge for Banks Hands Down

No matter the type or asset size of the financial institution in question, effectively managing regulatory change has proven to be the common challenge facing compliance professionals at U.S. banks, credit unions and other lenders, according to a new survey issued by Wolters Kluwer.

In fact, this same challenge topped last year’s list of concerns in the company’s annual survey: the latest iteration of findings in the just-published, 10^th annual Regulatory & Risk Management Indicator survey point to a raft of risk and regulatory concerns keeping compliance professionals awake at night, but regulatory change continues to lead the pack of items bedeviling bank compliance teams.

Given the prominence of these concerns, it may be no surprise that Wolters Kluwer’s 328 survey respondents this year also cited having a sound, consistently updated regulatory library as their chief means of effectively managing the ever-evolving scope and volume of laws and regulations to which banks are beholden.

“Unquestionably, the 2022 Indicator findings point to the critical role that a robust regulatory change management program—particularly one featuring an up-to-date regulatory library—plays in helping ensure compliance and addressing risk across a lending organization,” noted Timothy R. Burniston, who is Senior Advisor for Regulatory Strategy withWolters Kluwer Compliance Solutions, in the company’s survey press release.

Burniston along with colleague Elaine Duffus recently presented a webinar that details key takeaways from the latest Indicator survey: https://www.wolterskluwer.com/en/expert-insights/annual-survey-tees-up-compliance-and-regulatory-concerns-for-2023

Wolters Kluwer launched the Indicator in 2013 with the aim of “taking the pulse” of the U.S. banking industry. The tool measures lenders’ regulatory and risk trends and concerns, along with anticipated and actual regulatory impacts affecting institutions, and banks’ relative abilities in managing risk. Regulatory factors, together with input from survey respondents, help to generate a “pain index” snapshot of major risk and regulatory challenges facing U.S. banks.

Among the top obstacles cited in implementing effective compliance programs, 54% ranked manual compliance processes as a “7” or higher concern on a 10-point scale, a nine-point increase over 2021, followed by inadequate staffing (44%), and too many competing priorities (38%). Perceptions of regulatory scrutiny of fair lending programs reflected a slight uptick with 16% of respondents observing a considerable increase in fair lending scrutiny, rising 2% over 2021.

Leading the issues respondents identified as being “Very Concerned” or “Somewhat Concerned” about include the Section 1071 small business lending data collection, a rule that is still pending release. Next are Bank Secrecy Act and Anti-Money Laundering (BSA/AML) rules (63%); fair lending laws (63%); Beneficial Ownership, UDAAP rules and CECL (Current Expected Credit Losses) requirements (all tied at 62%). CRA modernization (58%) and state regulatory rules (57%) closed out the list.

Elements that comprise the list of key compliance and risk challenges are many, according to Wolters Kluwer’s survey. Respondents cited the ability “to manage risk across all lines of business” as their top concern (59%). Following was the ability “to maintain compliance with changing regulations” (58%), to “keep track of regulations” (55%) and “to demonstrate compliance to regulators” (54%), all factors up notably over last year’s survey.

Concern about new regulations jumped considerably, from a score of 67 in 2021 to 114, a 47-point increase. Banks anxiously await a final rule on Community Reinvestment Act (CRA) modernization, along with the release of final rules on small business lending data collection, Section 1071 of the Dodd Frank Act. Both regulations are expected to have a significant impact.

Another area of increased anxiety are concerns about the continuing use of manual processes and spreadsheets to perform regulatory compliance functions. Eighty-five percent of respondents were “sometimes or often” concerned by manual processes’ continued prevalence in their organizations, versus only nine percent who indicated their institutions rarely used manual processes.

A new area of exploration in this year’s survey focuses on lenders’ use of digital technologies to support their businesses. Nearly three-quarters of respondents indicated they have made some progress with digitizing their lending capabilities, although only 28% indicated their institutions have made significant progress or are fully digitized.

“Clearly, the banking industry increasingly recognizes the upsides in employing and more fully leveraging digital processes and automation, particularly given their impact in reducing or eliminating time-consuming and less accurate manual processes from their everyday workflows,” said Steven Meirink, Executive Vice President and General Manager, Wolters Kluwer Compliance Solutions. “Ultimately, embracing digital transformation can help improve the customer experience, foster inclusivity, and allow lenders to more effectively compete.”

In considering the benefits of automation to manage regulatory change, respondents ranked in descending order of importance the following capabilities, led by maintaining a regulatory compliance library (50%), connections that map to other elements of an institution’s compliance program (43%) and speed (37%), with analysis (36%) and technology (35%) rounding out the list.

Looking forward to 2023, top risk management priorities identified include cybersecurity (72%), compliance risk and credit risk (both at 51%), followed by operational risk and third-party risk (27% and 16%, respectively).