Regulatory compliance is a chief concern for banks, now more than ever. Seemingly on a daily basis, a new regulatory statute is being written or coming into law. Banks that do business not only in the U.S., but globally as well, must be aware of an every-changing regulatory landscape and make sure they are compliant. Bank Systems & Technology talked to several industry observers about the major regulatory requirements banks are preparing for in 2013.
Dealing With Dodd-Frank
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law over two years ago, but many of its provisions have yet to be implemented. One such part of the bill, Section 1073, is tentatively slated to go into effect in February and has the attention of the banking world. This part of the bill amends the Electronic Funds Transfer Act, which governs consumer payments initiated in the U.S. but sent to recipients in other countries, often generically referred to as "remittances." Among the new expectations the regulation requires from banks around these payments is to tell consumers the fees and taxes involved in such payments before they are conducted, which can be extremely difficult to calculate, says Nancy Atkinson, senior analyst with Boston-based Aite Group.
Atkinson notes that many times intermediary banks take a slice of the payment for themselves as a kind of fee, which will force the banks that initiate the payment to contact the intermediary bank to find out what that percentage will be, which varies between institutions.
Also, adds Atkinson, the aspect of Section 1073 that requires banks to tell the initiator of the payment what taxes will have to be taken out of that payment is difficult to fulfill.
"Each country has its own tax laws, and in many countries it depends on the purpose and type of the payment," she says.
Atkinson notes that there has some rumblings the government will delay the implementation of this part of Dodd-Frank, but it's something banks will eventually have to deal with regardless.
The end result of 1073 is that fewer banks will provide these types of services, says George Ravich, EVP and CMO for Fundtech.
"The banking industry is most definitely the whipping boy of government – an easy target for an official who want to play to the cheap seats," says Ravich. "The industry must earn its way back to its position as a critical and constructive pillar of society; yet prevent the apparent piling-on that is occurring. In order to do this, it must be carefully explained to regulators and the public that too much regulation is not only bad for the economy as a whole but that it can often backfire and cause more damage than good. The industry’s reaction to DF-1073 is a perfect example of this, where the likely net result will be that the consumer cost of a foreign transaction will increase, and there will be fewer banks providing these services due to intolerable regulatory requirements."
Bring on Basel III
The other major regulation for banks to deal with, albeit on an international level, is Basel III.
Basel III, a set of global regulations on bank capital and risk management set by The Basel Committee of global regulators, will be formally phased in starting January 2013. The guidelines were developed as an international regulatory standard to test bank capital adequacy and liquidity risk.
Many of these new capital standards will affect how banks operate, says Aite Group's Atkinson. One such example is the new statute that banks must now incorporate trade finance activity as part of their capital reserves. "Previously, this was considered off-balance sheet," she says, while adding that this requirement will likely only affect larger, multinational banks.
The Role of Technology in Compliance
The scope of regulatory requirements in the banking industry continues to broaden. Regulation used to be something that firms complied with or reported on; they didn’t contend with it directly from a strategy and competition standpoint, opines Cubillas Ding, research director at Boston-based Celent.
In planning and executing to technology initiatives for risk management and regulatory change, business and IT leaders should ask pertinent questions, says Ding. These include:
-- Where should we orchestrate the various regulatory and risk initiatives? -- How significant are the synergies linking projects? - What technology “bets” should a firm be placing, and when? -- How can we maintain flexibility and explore technology options to go to market faster (e.g., open source analytics, cloud deployments, joint R&D arrangements, venture capital, etc.)?
"While the industry changes in the coming years, individual firms will face a high degree of risk and unpredictability in how markets, participants, and clients will respond," notes Ding. "Firms would do well to equip themselves to discern risk more clearly and to develop sustainable mechanisms for decision-making."
Timothy Burniston, VP and senior director, regulatory consulting practice, atWolters Kluwer Financial Services believes there are three important steps institutions can take to prepare themselves for 2013 and the regulatory and supervisory deluge to come:
-- Creating a strong compliance culture driven from the top by the board of directors and senior management is essential. Regulators expect it, as do other stakeholders.
-- Taking the time to understand and apply the consumer-centric risk rubric that is reshaping supervision. Compliance has gone well beyond just adherence to technical requirements and reaches into the features, terms and administration of products and services across their entire lifecycles.
-- The need for data analysis to be a core component of every institution’s effort to ensure compliance and to safeguard its reputation. For example, the analysis of consumer complaints opens a new dimensional portal to perceptions about customer relationships. Further, analysis of lending data gives an institution insight into the success or failure of efforts to reach all segments of its local community.
"The cold reality is that regulators, as well as consumers, with access to more data than ever before, are making it a point to use available information to drive their agendas," he adds. "This should incentivize institutions to get ahead of the curve by knowing what their data says about them, and to tell their story before someone else does it for them."
Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio