Compliance Headaches of Dodd-Frank

Published in the Project Post-Gazette, January 2014

by Cheryl A. Wilson, PMP, PMI-RMP, CCEP

January 2014 PPG

Compliance1GavelSince the financial crisis of 2008-2009, banks have had to adopt a more complex regulatory environment than they had in the past. The new requirements of the Dodd-Frank (Wall Street Reform and Consumer Protection) Act was implemented in hopes to prevent another such financial collapse, but in the process added many more compliance statutes banks have had to comply with.

Opponents to the increase regulatory compliance will point to the fact that there will be an increase in resources (money, time, intellectual capital) that must be committed to regulatory compliance and that these are resources that will be withheld from other areas such as customer service, research and development and innovation. Compliance and risk professionals will need to now look more at operational risk, compliance and anti-fraud compliance solutions and therefore organizations will need to spend more on compliance activities.  Risk and compliance programs are usually considered as overhead in most organizations.

Proponents to this increased costs related to the regulatory burden, both in technology to handle the greater compliance workload and in personnel in these areas have indicated that over the past several years some best practices have emerged, and banks have acquired some good “lessons learned”.  Compliance and risk managers have either had to be hired or have had to ensure organizational balance for all the new regulatory headaches.  At least these professionals have the ear of the senior management as these new regulatory monsters cannot be ignored or they will face steep noncompliance fees and/or damage to their company’s reputation.

As compliance and risk professionals take increased proactive measures to prove organizational compliance with industry regulations they should find that the end result will be increased adherence to compliance requirements and improved business processes such as banking initiatives, or looking at potential merger and acquisitions (M&A) opportunities.

Managing compliance effectively and successfully is now more critical than ever. Size of the organization does not matter in regards to the amount or type of compliance regulations that is a part of the Dodd-Frank.  While many organizations have already worked to become compliant to address the many Dodd-Frank provisions, banks have until July 2015 to bring their organizations into compliance with the additional Volcker Rule requirements.  The Volcker Rule prevents banks from engaging in trading on their own behalf, particularly in the kind of high-risk activities that created so many problems in the financial crisis of 2008-2009.  It also limits banks’ investments in hedge funds and private equity funds.

For organizations to be compliant with the Volcker Rule, they will need to make sure four key elements are in place to help avoid potential problems:

  1. Effective compliance and reporting structures:  Not only should the compliance program cover the increased regulatory requirements, but the risk professionals should address potential risks the Volcker Rule could bring such as anti-money laundering and trade surveillance concerns.
  2. Comprehensive data gathering and analysis:  Not only should banks be looking at how to report their data into automated and consolidated reporting structures, but how risk mitigation is being done to reduce risk.
  3. Compensation and governance:   The Volcker Rule requires that compensation arrangements not be designed to reward any prohibited trading activities.  Banks will need to increase their surveillance programs to monitor the behavior of all employees to ensure no wrong doing that benefits the bank or the employee is occurring.
  4.  Communication and Culture:  As even unintentional violations are as offensive as intentional violations under the Volcker Rule, banks will need to increase communications to train and inform employees of additional policy and guidelines to avoid higher penalty should they be cited with a violation.

The Dodd-Frank is here.  Five years after the financial crisis, only about 50 percent of the Dodd-Frank Act has been implemented. Since its inception, much has been done to make the financial system safer, sounder and more secure, mainly due to increased requirements for more capital and less leverage on the balance sheets of major financial institutions. But the uncertainty about some of the proposed rules, some of the complexity of the written rules, and the lack of coordination across national boundaries are all causing financial institutions to pull back from fully embracing Dodd-Frank.


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