How to survive the growing compliance burden

RMA Journal, The, April, 2005 by Phillip J. Britt

It's sink or swim with compliance, especially as it pertains to Bank Secrecy Act regulations. Bankers, consultants, and a regulators join voices to help community banks develop a good breast stroke, rather than drowing under hundreds of compliance rules.

Years ago, an animated TV public service announcement began with a guy on one boat yelling at a guy on another boat. One of them is attacked by a bigger boat, and both guys end up on the same boat. The two former rivals join forces to begin fighting with the bigger boat. And so on.

An equivalent situation comes to mind with how small banks have begun to have common problems with larger banks about regulatory burden. Now banks and regulators seem to be on the same side as they try to deal with legislative actions resulting in extraordinarily burdensome expanded compliance demands.

How are banks, especially resources-strapped community banks, handling compliance expectations that seem unrealistic with penalties that are truly frightening? According to a 2004 Cornerstone Advisors study of mid-sized banks, audit and compliance staffs have risen 13% across the country. Additionally, because their services are in more demand, compliance specialists' salaries are increasing as well.

But the staff increases have primarily been at mid-sized and larger financial institutions. Community banks don't have the financial wherewithal to add staff to deal with the increased compliance burden.

According to John M. Reich, FDIC vice chairman and a former community banker himself, the increasing cost of compliance is a reason that more and more community banks are considering putting themselves on the market to larger financial institutions or going private.

In the past 20 years, the number of community banks has shrunk from about 12,000 to only 4,400, Reich says. While much of that consolidation has to do with deregulation, technologies that enable more efficiency from larger sizes, and economic factors, compliance costs have accelerated the trend in recent years, according to Reich.

"The costs of compliance are eating [community banks] alive," Reich says. "Community bank owners are starting to consider compliance [costs] in determining how long to continue to stay independent before the costs erode the value of their investments."

"There's a sense that compliance is part of the cost of doing business," agrees Claude Hanley, partner with Capital Performance Group, Washington, D.C. "But it's becoming increasingly onerous to meet compliance standards, particularly for banks under $1 billion. Now [community] banks are looking at the cost of compliance in their succession plans."

Looking at Solutions

Some bank executives looking at how best to deal with the burden of compliance are continuing to maintain the compliance function in-house. Others will turn to outside firms, which have seen an increase in inquiries from community banks.

However the bank handles compliance, bank executives and directors must realize they are ultimately responsible for abiding by the law, Reich and consultants say. Management and staff alike need to be aware of compliance rules that affect their particular job responsibilities. Tellers should be aware of rules for opening accounts in Truth in Savings, loan officers should know Truth in Lending, and others should be similarly informed about regulations that affect their jobs.

Leveraging Resources

"Where a lot of people fall down is that they hire good compliance officers and then think they have a good compliance program," says Janet Bonnefin, president of Aldrich & Bonnefin, an Irvine, California-based law firm that focuses on financial compliance issues. Firm founder Mark Aldrich launched Bankers' Compliance Group 24 years ago to help bankers come up to speed with Truth in Lending. A group of more than 170 California-based community banks shares legal costs and resources for compliance, including the services of Bonnefin's firm, which provides seminars and newsletters on compliance issues.

Compliance shouldn't be a competitive issue, Bonnefin explains, as sharing resources and knowledge can help all community banks meet their regulatory obligations. In this way, they can gain some of the same benefits of scale of large financial institutions. "At large banks, whole departments do what one person has to do in the community bank," Bonnefin says. "At a large bank, a lot of what the [chief] compliance officer does is manage other people. At a community bank, the compliance officer writes policies and procedures, produces [compliance] forms, and trains people."

The compliance officer (or consultant) also should be brought to the table whenever a bank develops new financial products, which often have their own compliance complexities, Bonnefin adds. Involving compliance at the beginning of product development is much more cost effective than developing the product, marketing campaign, and so forth, then discovering that the product presents a compliance problem.

Sharing resources also works for holding companies that operate multiple community banks, says Ann Hengel, chief risk officer and executive vice president for $6 billion Bremer Financial, St. Paul, Minnesota, which owns 10 community bank charters. Each bank has between $100 million and $2 billion in assets. "We used to have a compliance officer in each of our banks," Hengel recalls. "Working alone, the officers didn't have the resources to develop comprehensive compliance procedures for the bank."