Bank compliance policy and procedures

In the past 10 years, more stringent bank compliance regulations mean financial institutions need to adapt to a constantly evolving landscape.

December 23, 2020

Article highlights

Have you looked at your bank compliance policy lately? If not, you should.

In the past 10 years, more stringent compliance regulations mean financial institutions need to adapt to a constantly evolving landscape.

According to Thomson Reuters, “The burden of daily regulatory updates received by our major banks has now risen to nearly 200, compared with around 10 a day in 2004.”

Unfortunately, many banks aren’t keeping pace with the changes. Case in point – the industry has seen a 45x increase in regulatory fines and settlements between 2009 and 2014 relative to banks’ earnings and credit losses.

The disconnect might stem from the structure of most compliance models, which were designed for a different era. Rather than focusing on protecting consumers or mitigating risk, compliance served more as an enforcement mechanism for the legal department.

Ultimately, financial institution can’t ignore compliance policies – the costs are simply too high.

Bank compliance policy requirements

Generally speaking, financial institutions should put in place bank regulatory compliance policies and procedures to protect consumers and manage their risks.

In particular, the Federal Reserve Bank of Minneapolis outlines two specific regulations that banks need to comply with.

Regulation V (Fair Credit Reporting)

According to Regulation V (12 C.F.R. 1022.42), banks must have “reasonable policies and procedures concerning the accuracy and integrity of furnished information” that gets sent to credit bureaus.

So compliance policies and procedures address not only what information banks submit to credit bureaus, but also how accurate it needs to be and the integrity of that data.

So why are banks getting fined? The Federal Reserve Bank article says common violations occur when gaps exist in change management processes, compliance policies and procedures lack periodic reviews, and insufficient training leaves personnel ill-equipped to create or maintain these policies or procedures.

Regulation Z (Truth in Lending)

According to the Consumer Financial Protection Bureau, the government mandates reasonable written policies and procedures addressing a variety of topics: loan originator registration and compensation practices, steering, and identification requirements.

It’s not enough to follow bank regulatory compliance, or simply report on your compliance efforts, both of which take a more reacting-to-the-regulations approach.

Instead, the government is telling you to take a proactive approach by having written policies in place on how you intend to comply with the rules.


The role of policy and procedures in bank compliance

Banking and compliance regulations can prove daunting to understand, both in their complexity and the ever-shifting target to aim for. By adopting written policies, you can filter down the laws and regulations so every employee in the bank can understand them.

For instance, your typical bank teller might not know and understand the complex regulatory requirements (nor should you expect them to). But if your policies and procedures foster compliant behavior, it keeps the entire institution out of trouble.

Think of these policies and procedures as compliance tools for banks. By putting everything in writing, they help provide clarity and consistency for employees at every level.

The policy document can help distinguish between potentially problematic actions (because they might violate federal law) from those actions that might only be specific to your institution.

Compliance policies and procedures empower those who want to do the right thing by giving them a framework and process for doing so. There is no policy in the world that can stop someone with bad intentions from breaking the law. But what a bank policy can do is help avoid the inadvertent mistake that can put the whole operation in jeopardy.

In the same way, these policies also protect your institution from some added risk by showing you did everything in your power to put in systems and processes to prevent problems. Then, if a rogue employee does any wrongdoing, it is not due to the bank’s negligence.

When you adopt and implement written policies – and train your staff to those policies – you demonstrate your commitment to compliance.

How to ensure compliance with bank policies

As hinted above, creating bank policies and procedures that comply with regulations lays the foundation for compliance. But there’s more.

Ensuring compliance in financial institutions requires a concerted effort on many fronts, from communication and training to organizing and measuring efforts.

1. Clearly communicate changes or revisions

Assuming you already have written compliance policies to address these crucial banking issues, communicating any policy changes or revisions marks a solid first step towards compliance.

Employees need to not only know that a policy or procedure has changed – they need to know exactly what changed. At a quick glance, they should be able to easily see what specifically has changed, when it changed, and when the new policy goes into effect.

It is not enough to simply update a company handbook with policy revisions and check that compliance box. Instead, to ensure compliance, you need to communicate these changes to employees so they know how it impacts their day-to-day jobs.

2. Make policies accessible from a central policy management system

Gone are the days of printing out all your policies and procedures and sticking them in huge binders to sit on shelves in every department. And relying on emails or shared drives to distribute compliance policy changes pose their own challenges.

How can you ensure employees even read the email or saved the most current policy version? How can they quickly even find a policy if it’s buried in a huge file directory filled with inconsistent naming conventions?

The sheer volume and complexity of banking regulations, along with the frequency in which they change, require a more modern approach.

With a policy management solution, like PowerDMS, you can provide one central repository for all policies where employees can search for and find the information they need quickly and easily.

This gives them confidence in knowing exactly where to look for the right information. Plus, a good policy management system gives your institution confidence that employees are always accessing the most up-to-date version of each policy.

Another benefit? It saves an enormous amount of time and energy by automating many of the compliance tasks that were previously handled manually.


3. Have employees sign individual policies and updates

To ensure better bank compliance, require your employees to electronically sign each policy annually, including each new version of the policy when you release it. This accomplishes two things.

First, it gives employees an additional level of accountability to follow that policy.

Second, it adds another layer of protection for your institution (from a risk management perspective) since you can now prove that every employee acknowledged the policy.

Therefore, if employees don’t adhere to the policy and something happens, you can prove, via a digital audit trail, that you gave employees the information they needed to properly comply.

4. Provide compliance training

The best way to reinforce compliance policies and procedures? Tie your staff training directly to your compliance policies and procedures so employees know specifically how to comply. Your training and policies should work hand-in-hand, with one feeding off the other.

Rather than providing training in a vacuum with general compliance guidelines, your training should support the specific provisions of the policy and walk through the different procedural steps.

To check employees’ level of understanding, give them quizzes on the content, hold mock drills of specific compliance-related scenarios, and schedule practice runs to watch employees in action.

When it comes to bank compliance, training and policies should all work together – especially in those areas that could cost the most in terms of fines or settlements down the road.

5. Create a culture of compliance

Compliance policies should play a key (but not solitary) role in creating a culture of compliance and ethics in your financial institution. Operating with transparency, ethics, and integrity is the hallmark of a high-functioning, well-managed company.

If you adopt a winning-at-all-costs operational approach (seeing just how close you get to that regulatory line), you are setting a risky tone that will seep through your institution from top to bottom. In this what-can-we-get-away-with scenario, it is much more likely that employees will misstep and cost you in the end.

On the contrary, if you establish a culture of integrity and set expectations that employees will not be cutting corners or skirting the edge of compliance, you set the bar high for how employees should behave.

Further, if you drive home the message that you will handle compliance issues swiftly and fairly, you establish the importance of regulatory compliance within your institution. For more information on regulatory compliance across industries, check out our article here. 

To achieve a more robust bank compliance program, you should start with your institution’s policies and procedures to lay a solid foundation. Then, layer upon layer, build a culture of ethics and integrity that clearly communicates how to apply these values to their day-to-day jobs. This underscores the important of making compliance a part of everyone’s job.

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