Survey Examines Risk, Compliance Concerns

According to the 10th annual Wolters Kluwer Regulatory & Risk Management Indicator survey, keeping pace with the volume, scope and breadth of regulatory changes tops the list of key concerns facing U.S. banks, credit unions, and other lenders. This finding marks the second consecutive year in which an institution’s ability to manage regulatory change in an effective and compliant manner was viewed as the chief challenge for institutions of all asset sizes.

“Unquestionably, this year’s survey 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,” said Timothy R. Burniston, Senior Advisor for Regulatory Strategy with Wolters Kluwer Compliance Solutions.

The Indicator takes the pulse of the U.S. banking industry by measuring trend information on regulatory and risk concerns, realized and anticipated regulatory impacts on institutions, and the level of banks’ current risk management efforts. The survey’s data inputs generate a regulatory and risk management “pain index.”

Wolters Kluwer Compliance Solutions conducted the Indicator from July 27 to September 9, 2022 and from 328 respondents generated a Main Score of 94, a decline from the 2021 score but a result closer to pre-pandemic scores. This year’s decline was driven largely by a significant drop in the dollar amount of regulatory penalties and fines and the number of associated enforcement actions compared to 2021. The Main Score is based on several factors, including the number of new federal regulations, number of enforcement actions, and the dollar amount of fines imposed on banks and credit unions over the past 12 months, together with survey respondents’ input.

When asked about the overall compliance and risk areas demanding their focus, respondents identified the ability to manage risk across all lines of business as their top concern (59%), closely followed by the ability to maintain compliance with changing regulations (58%), and ability to keep track of regulations (55%) and ability to demonstrate compliance to regulators (54%), all factors up by several points over last year’s survey.

Concern over new regulations also jumped considerably, from a score of 67 in 2021 to 114, a 47-point increase. Banks are anxiously awaiting a final rule on Community Reinvestment Act (CRA) modernization. Also on the horizon is the release of final rules on small business lending data collection implementing Section 1071 of the Dodd Frank Act, which are expected to have a significant impact and be issued no later than March 31, 2023.

In fact, 68% of respondents are “Very Concerned” or “Somewhat Concerned” about the anticipated small business lending data collection rule and their institutions’ ability to manage those requirements. Next on this list of compliance concerns 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.

Against the backdrop of technology’s increasing incorporation into banking practices and the rise of fintech, respondents also cited concerns about the continuing prevalence of manual processes and use of spreadsheets “sometimes or often” (85%), versus only nine percent who indicated they rarely used manual processes.

The survey asked about 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 VP 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.”

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.

To read the full report, including more data and methodology, click here.