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Automating Compliance in Community Banks
Few industries are regulated with such scrutiny as the banking industry. Today, it must comply with a growing number of standards set forth by federal law — from the Sarbanes-Oxley Act to the Gramm-Leach-Bliley Act, to the more recent Dodd-Frank Wall Street Reform and Consumer Protection Act.
With more demands and stricter regulations, many leaders in the banking industry feel overwhelmed and do not expect these demands to lessen any time soon. Although compliance is difficult to maintain at banks of any size, it presents a greater challenge for smaller community banks. Undoubtedly, community banks operate on a smaller profit margin than the larger banks and have fewer resources, such as staff and capital. In addition, the instability of the U.S. economy has further complicated the situation, as it has helped stimulate the need for increased regulation and forced many community banks to close branches and eliminate staff in order to maintain profitability.
Automation is the most viable solution for community banks to meet compliance demands and sustain or increase profit margin. Essentially, automation technology helps these banks do more with less, while addressing, complying with and sustaining regulations, such as the Dodd-Frank Act.
Signed into law in July 2010, the Dodd-Frank Act has forced more community banks to realize the value of investing in automation technology. A direct result of the unstable economy, the Dodd-Frank Act is designed to increase transparency of financial institutions to augment financial stability amid economic downturn. The regulations set forth by the legislation have put a great deal of pressure on community banks, making the law one of the most controversial compliance mandates to date.
In fact, in July 2011, the American Bankers Association released a statement criticizing the Dodd-Frank Act’s negative effect on community banks. In this report, the ABA pin-pointed several problematic areas, including provisions regarding risk retention, higher capital requirements, the Securities and Exchange Commission’s municipal advisors rule, derivative rules and increased size of the FDIC Deposit Insurance Fund. With that in mind, it is no wonder community banks are seeking the latest in automation technology to simplify and enhance their compliance activities.
Automation eliminates the manual labor hours required to effectively stay on top of regulation, ensure compliance and reduce risk. Failure to adequately — and proactively — maintain compliance exposes banks to overall increased costs and loss of market share to competitors that are diligent in maintaining their compliance efforts. Losing profits and increasing fees is not an option.
With automation technology, community banks can manage and monitor risks associated with compliance activities. Detailed dashboards allow for real-time analysis and alert users when breakdowns occur, allowing them to take immediate action. Overall improved financial transparency supports compliance and risk exams, and internal audit controls can be integrated with compliance initiatives to leverage assets.
For smaller banks that are accustomed to Excel sheets and time-consuming, manual compliance efforts, selecting an automation solution may seem daunting. To identify the right software solution, these banks must first perform an overall risk assessment that identifies the impact and timing of regulations in conjunction with overall business objectives, and products and services offered.
Once requirements have been identified, community banks should consider their existing technology prior to looking at new technology, and ask themselves the following questions:
What are the objectives underlying the new regulations and which regulations does our current technology support?
What regulation changes are on the horizon and is it possible to modify our current technological infrastructure to address the new regulations?
Is it more cost-beneficial to purchase a new solution or modify current technology?
What are the direct costs of making the required changes and what risks are associated with the changes?
Should we outsource a product offering to eliminate additional compliance costs?
How can we monitor the results of the changes to ensure that they are compliant?
What internal control risks are associated with the changes?
How is privacy addressed and data integrity ensured?
What fraud prevention measures are embedded in the solution?
Is our staff trained effectively in assessing compliance, knowing the regulations and applying the mandates consistently and appropriately?
Now comes the task of choosing an automation solution. Depending on a bank’s objectives and priorities, key features and functions of an automation solution should include the following:
- Detailed, exportable data and documentation that will facilitate the audit process.
- Workflow management capabilities to increase productivity and segregate duties for improved internal control.
- Data encryption to protect sensitive information, thus meeting requirements set forth by the Payment Card Industry Security Council and other legislative organizations.
- Constant, flexible monitoring of industry regulations and account guidelines to support business decisions.
When selecting a software vendor, a small bank should seek the same qualities a large bank seeks, as compliance requirements are universal and mergers and acquisitions turn today’s small banks into tomorrow’s large banks. The ideal software vendor should have an excellent reputation for successfully helping banks follow mandates and supporting future growth.
At first, automation technology might seem costly for smaller banks operating with fewer resources. Therefore, management must ask, “What is the return on investment of the solution?” For an idea of how automation can improve the bottom line, community banks should assess how many manual labor hours are utilized to perform critical functions to maintain compliance, and estimate how many of these hours can be eliminated with automation. Banks must also take a forward-looking approach and identify projected future costs based on estimated forecasts and upcoming regulations, and calculate them into their return on investment analysis.
While the scope of an implementation in a community bank might be smaller than that of a larger bank, clearly identifying objectives and supporting the company’s strategy drive a successful implementation. With the right solution in place, even small community banks will have the tools necessary to effectively and easily operate in compliance with today’s most rigorous industry rules and regulations.
Sheila A. Volgelberger is vice president of accounting consulting and development at Chesapeake System Solutions Inc.
Copyright (c) November 2011 by BankNews Media.