Janet Yellen, Chairwoman of the Board of Governors of the Federal Reserve, recently gave a speech that questioned Wall Street’s ethics and culture – and hinted at an overall approach to regulation that should have compliance officers taking note.
To quote Ms. Yellen “…the Fed also promotes safety and soundness by seeking to ensure that banks are well managed and subject to strong governance by a board of directors responsible to shareholders. It is unfortunate that I need to underscore this, but we expect the firms we oversee to follow the law and to operate in an ethical manner. Too often in the recent years, bankers at large institutions have not done so, sometimes brazenly. These incidents, both individually and in their totality, raise legitimate questions of whether there may be pervasive shortcomings in the values of large financial firms that might undermine safety and soundness.”
While these comments were directed primarily at large institutions concerning safety and soundness, I believe they reflect a regulatory tone of which compliance officers in all institutions, regardless of size, should be aware. In this speech Chairwoman Yellen goes on to describe several actions that the Fed is taking to ensure the errors and omissions of the past do not happen again.
Formation of a Large Institution Supervision Coordinating Committee (LISCC)
The LISCC is a centralized body at the Federal Reserve Board. As such, its formation likely weakens the power of the individual Federal Reserve Banks — which may mean less tailoring regulatory examinations to the individual institution.
With the advent of the LISCC, the Fed is better able to monitor not only what is going on at individual institutions, but also the broader trends in the markets. Thus, your next exam may not necessarily be based on your bank’s individual risks but the risks your regulator sees in the broader market. You may have a great indirect auto program with top notch monitoring, but because indirect autos are a key risk area in the market, you may find yourself talking about your indirect auto program during your next exam. If this sounds familiar, it is because this approach seems very similar to what the CFPB describes in its risk-based approach to examinations.
Apparently there is concern that examiners, especially those who are housed in the institutions they examine, have become too friendly with their examinees. This has led to instances where the examiner forgets he/she represents the public interest – not the interests of the industry and the individual institution. Sounds like your examiner just got a little less friendly and more hardnosed about adherence to the regulations.
To summarize Janet Yellen’s comments, her remarks suggest that regardless of the regulator, the 2015 regulatory environment will be characterized by more centralization of regulation in Washington, a two pronged approach to examinations – a the institutional level and market level, and stricter examinations. Please be prepared!