Dodd-Frank to Dominate Financial Institutions’ 2011 Compliance Concerns

Coping with the uncertainty of the Dodd-Frank Act’s implementing rules and its newly-formed Consumer Financial Protection Bureau (CFPB) will be among U.S. financial institutions’ foremost concerns in 2011. And so will numerous other compliance and risk management challenges, according to the experts at Wolters Kluwer Financial Services.

Heather Czermak, director of Consumer Compliance for Wolters Kluwer Financial Services, has observed that the financial services industry is taking a definite wait-and-see approach to addressing the passage of the Dodd-Frank Act.

“Financial institutions are watching their federal regulators closely to see what their next moves will be in terms of instituting requirements,” said Czermak. “But that doesn’t mean they’re sitting idly by. To prepare themselves for the imminent changes to come, many are conducting thorough compliance and risk management program reviews to help ensure they’ll meet any new requirements thrown their way.”

Edward Kramer, executive vice president of Regulatory Programs for Wolters Kluwer Financial Services, agrees. Kramer has also seen institutions carefully evaluating their staffing levels and qualifications to make sure they are ready to comply with the Act’s new requirements, and more specifically, oversight by the new CFPB.

“The CFPB’s rulemaking authority doesn’t just apply to banks and credit unions,” Kramer said. “It also applies to mortgage and auto finance companies and essentially any financial institution that is considered a ‘non-bank.’ This authority could make the CFPB one of the most powerful regulatory agencies in the U.S. and result in significant compliance and operating costs for institutions of all sizes and types.”

Dodd-Frank is also a major focus for indirect lenders, such as auto dealerships, that are examining how their business may be affected.

Indirect lenders are also focused on new requirements like the risk-based pricing rule. This rule affects lenders that rely on information provided by consumers’ credit reports. “Beginning in January, lenders, including indirect lenders, must notify consumers who receive less favorable credit terms than others based on credit information,” said Chip Zyvoloski, senior attorney, Indirect Lending, at Wolters Kluwer Financial Services. “The process around these notices is very detailed, which means these lenders will need to evaluate current underwriting processes.”

According to David Thetford, Securities Compliance principal analyst at Wolters Kluwer Financial Services, securities firms will be gearing up for compliance with Dodd-Frank as well since they are subject to additional oversight. One more significant change under the Act is that many advisers to hedge funds and other private funds will now need to register with the Securities and Exchange Commission (SEC). Also, many advisers currently registered with SEC will now be required to register with and be examined by securities regulators in their home states, depending on the amount of assets they manage.

The SEC’s budget is expected to double over the next five years in light of this and other new responsibilities it will assume under Dodd-Frank. It is possible that the budget increases may not be as large as the Act provides, due to the change in the balance of power in the House of Representatives as a result of the November 2010 elections. However, the agency has already projected it will hire 800 new staff members in 2011

“These increases in staff are primarily in enforcement and examination divisions, enabling the SEC to increase its ability to oversee the industry,” said Thetford. “That will likely mean more in-depth examinations and stronger enforcement actions.”

In addition to the Dodd-Frank Act, the U.S. insurance industry has experienced a dramatic amount of regulatory change in 2010 affecting all lines of business and will likely continue to do so in 2011, according to Kathy Donovan, senior compliance counsel, Insurance, at Wolters Kluwer Financial Services. During the first three quarters of 2010, more than 18,000 state and federal laws or regulations that affect the U.S. insurance industry were changed or created.

“Health care reform was the key area of regulatory focus and impact for insurers this year,” said Donovan. “Health insurers faced multiple policy form revisions and, as an industry, witnessed some fairly large market conduct fines assessed to individual companies.”

One thing institutions in the insurance, banking and securities industries will need to pay attention to in 2011 is managing compliance, operational and financial risk more holistically, said Todd Cooper, vice president and general manager of Enterprise Risk Compliance for Wolters Kluwer Financial Services.

“The hard part for institutions is getting all employees to make risk management a needed part of their everyday duties,” said Cooper. He cites leadership from the board of directors and executive management in instilling a culture of risk management as one factor for success. He says implementing sound enterprise risk management policies and procedures is another.

“But that’s not enough,” said Cooper. “You can’t just trust that your employees are doing what’s needed to meet regulatory requirements and help you effectively manage risk. You need to test. You have to validate that those things are happening or you could be in for a nasty surprise when it comes time for your next regulatory exam or to evaluate your financial losses for the year.”

About Wolters Kluwer Financial Services
Wolters Kluwer Financial Services is a comprehensive regulatory compliance and risk management business that helps financial organizations manage risk and improve efficiency and effectiveness across their enterprise. The organization’s prominent brands include: FRSGlobal, ARC Logics for Financial Services, PCi, Compliance Resource Network, Bankers Systems, VMP® Mortgage Solutions, AppOne®, GainsKeeper®, Capital Changes, NILS, AuthenticWeb™ and Uniform Forms™. Wolters Kluwer Financial Services supports its global customers with offices in more than 20 countries and is the leading worldwide provider of compliance and risk management solutions for the financial services industry, serving more than 15,000 banking, insurance and securities customers across the globe. Wolters Kluwer Financial Services is part of Wolters Kluwer, a leading global information services and publishing company with annual revenues of (2009) €3.4 billion ($4.8 billion) and approximately 19,300 employees worldwide. Please visit our website for more information.

Nov 30, 2010