Stronger focus on protecting the consumer will likely be the driving force behind new regulations and enforcement actions in the financial services industry in the coming year, according to experts at Wolters Kluwer Financial Services
Regulators May Lean Toward a More Principles-Based Approach to Compliance
A stronger focus on protecting the consumer will likely be the driving force behind new regulations and enforcement actions in the financial services industry in the coming year, according to experts at Wolters Kluwer Financial Services, a leading provider of compliance and operational risk management solutions to financial organizations. The recent subprime mortgage and credit crises; identity theft and other consumer-related fraud; the creation of a new securities regulatory agency; and an active political landscape could all be contributing factors.
“It’s very possible that 2008 will mark the beginning of a dramatic shift in regulatory compliance in the financial services industry,” said Sue Burt, senior attorney at Wolters Kluwer Financial Services. “New guidance, enforcement and legislation could very well direct financial institutions to take on a much more active role in helping their customers choose the products and services that best suit their needs.”
Determining suitability, instead of simply ensuring customers understand the terms and conditions of a particular product or service, is a major part of proposed mortgage reform legislation currently being considered in Congress. But according to Amy Downey, senior regulatory consultant for Wolters Kluwer Financial Services, regulators aren’t waiting for laws to be passed.
“Many financial institutions have told us that regulators have been checking to see if they provided the customer the most suitable product during this year’s audits on their nontraditional mortgage products,” said Downey. “The regulators are calling it responsible lending and making sure the institutions know it’s their responsibility to help customers choose the loan with the highest net tangible benefit to the customer.”
This shift from prescriptive-based compliance to a more principles-based approach, is also emerging in the U.S. securities industry. The newly-formed Financial Industry Regulatory Authority (FINRA) has indicated that its new rule book, which is currently being written, could have more principles-based regulations instead of prescriptive, cut-and-dry rules.
“Protecting investors has become a top priority for regulators as baby boomers enter retirement and put a lot of money in motion for financial advisors,” said David Thetford, securities compliance principal analyst at Wolters Kluwer Financial Services. “With all of the options for money management and retirement planning, there is opportunity for financial abuse—especially among the elderly. Unfortunately, you can’t prescribe ethics. That’s why some regulators would rather cast a wider net in a shift toward principles-based regulation that says, ‘You must do right by the customer.’”
Pressure from consumer groups is also impacting the regulatory environment, said Pam Ewing, senior product manager for Insurance Compliance Solutions at Wolters Kluwer Financial Services. In the insurance industry, this has played a role in the increase of activity at the federal level.
“One good example is the use of credit scoring in insurance,” said Ewing. “For years, the debate about the validity of the use of credit scores has gone on at the state level and at the National Association of Insurance Commissioners. What we are now seeing is a movement on the part of consumer groups to get Congress to ban the use of credit scores in insurance underwriting and rating.”
New rules aimed at or driven by the consumer can lead to changes in the way financial institutions conduct their everyday business. For example, several new provisions within the Fair and Accurate Credit Transactions (FACT) Act set to take effect in 2008 are causing a lot of banks and credit unions to look at their current practices, according to Ted Dreyer, senior attorney at Wolters Kluwer Financial Services.
“Every institution will need an identity theft prevention program as a result of the FACT Act’s new red flag requirements including required training of staff on preventing identity theft,” Dreyer said. “And many institutions will have some changes to make to their customer privacy programs related to the new affiliate marketing regulations.”
Kevin Kopp, director of Indirect Lending at Wolters Kluwer Financial Services, says that in addition to the FACT Act, the indirect lending industry will also be paying close attention to states that are considering legislation similar to California’s Car Buyer’s Bill of Rights, and the potential expansion of multi-language requirements for lending contracts. But there are obstacles in meeting the requirements that could accompany new regulations.
“The biggest obstacle in the indirect lending industry right now is the lack of standardization,” said Kopp. “To become more customer-focused, the industry needs to agree on consistent methods and embrace technology.”
Protecting the consumer also requires forward-thinking, according to Dennis Outlaw, senior mortgage fraud consultant at Wolters Kluwer Financial Services. This is especially true in the area of mortgage fraud, which Outlaw says is one of the many contributing factors to the subprime meltdown.
“There will always be those who try to circumvent the process,” said Outlaw. “The challenge for financial institutions is to stay one step ahead of the bad guys by figuring out what new schemes and devices they’ll use to commit fraud. Thankfully, we’re starting to see better products and better parameters around the industry’s due-diligence processes.”
Many regulators are also taking a forward-looking approach as a result of the subprime mortgage and credit crises and the attention they have received from lawmakers and other politicians.
“Although the elections are still months away, the financial services community is already bracing for potential change in the political arena,” said Edward Kramer, executive vice president of Regulatory Programs for Wolters Kluwer Financial Services. “No matter who wins the presidency, there will likely be an increase in regulatory pressure. Neither side can ignore what’s been happening in the mortgage marketplace.”
But as financial organizations implement new policies and programs to deal with the coming regulatory change, Downey says their motivations should be clear to regulators.
“With the likely upcoming changes to the regulatory landscape, some financial institutions will put new policies in place benefiting consumers that they hope will please auditors,” said Downey. “But if an organization adds such a policy, it has to understand that auditors will be looking for more than just a policy—they will be looking at how successfully the institution is implementing it.”
About Wolters Kluwer Financial Services
Wolters Kluwer Financial Services provides best-in-class compliance, content, and technology solutions and services that help financial organizations manage risk and improve efficiency and effectiveness across their enterprise. The organization’s prominent brands include Bankers Systems, VMP® Mortgage Solutions, PCi, GulfPak, Desert Document Services, AppOne®, GainsKeeper®, CCH® Capital Changes, NILS INSource®, AuthenticWeb™ and CCH Wall Street®.
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