By Elaine Duffus
As published in BankingExchange.com
Introduction
The recent wave of executive orders from the Trump Administration signals a significant deregulatory trend that banking compliance professionals must carefully navigate. While some may view deregulation as a reduction in compliance obligations, experience suggests otherwise. Regulatory change—whether adding or eliminating requirements—demands rigorous attention from compliance teams.
Having served as a Chief Compliance Officer during previous regulatory shifts, I've observed firsthand that deregulation often creates substantial operational challenges. This article examines practical approaches to managing compliance in this evolving landscape, focusing on three critical areas: monitoring state-level regulatory developments as they fill potential federal voids; implementing technology solutions to streamline compliance processes; and maintaining comprehensive documentation of compliance decisions to ensure institutional knowledge preservation and examination readiness.
Impacts of deregulation on compliance
Deregulation refers to the reduction or elimination of government regulations in a particular industry and, potentially, includes the dissolution or merging of federal regulators. While prior deregulatory initiatives have aimed at increasing efficiency, promoting competition, and fostering innovation, their effectiveness in achieving these goals remains subject to debate. What is certain, however, is that significant deregulation creates substantial work for compliance functions.
For banking institutions, this is a critical time to strengthen compliance frameworks rather than relax vigilance. Manual compliance processes pose unnecessary risks during periods of regulatory flux, as they limit an institution's ability to systematically track, implement, and document changes across multiple jurisdictions.
The management of compliance obligations during deregulation requires robust systems and processes. Without a centralized repository of applicable laws and regulations, documented risk management practices, and effective reporting mechanisms, institutions may struggle to maintain both compliance and institutional memory. This becomes particularly evident when considering long-term implications: how will your institution recall why certain disclosures were discontinued or new fees were implemented five years from now?
Documentation serves as the foundation for accountability. Critical compliance records—including meeting minutes, audit outcomes, complaint data, risk assessments, examination findings, policies, procedures, and controls—require a logical central repository where they can be mapped to specific regulatory obligations. Spreadsheet-based systems typically cannot maintain these complex connections effectively. The current regulatory environment demands sustainable and scalable methods to monitor, manage, and document change.
State regulations will likely assume greater importance as federal oversight recedes. Banking institutions may soon face multiple, potentially conflicting state regulations instead of unified federal requirements. In cases where federal regulations exist alongside state rules, preemption may not provide clear resolution and often leads to protracted litigation.
Implementing robust, automated horizon-scanning capabilities and thorough documentation of decision-making processes is essential. When regulatory priorities inevitably shift again, institutions will need clear records of actions taken and their underlying rationale. While compliance personnel will change over time, properly documented institutional knowledge must persist.
Potential risks and challenges
- Increased Risk of Misconduct: Reduced regulatory oversight may create additional opportunities for financial misconduct, requiring enhanced internal controls.
- Compliance Complexity: Deregulation often leads to a more complex regulatory environment as institutions navigate evolving federal frameworks alongside increasingly divergent state obligations.
- Product Innovation Risks: Periods of regulatory transition may encourage the development of products or services with limited regulatory guidance, potentially increasing future compliance exposure.
- Uneven Oversight: Changes to regulatory structures, particularly regarding non-bank financial services providers, may create competitive imbalances and necessitate enhanced oversight of institutional partnerships.
- Reputational Risk: Compliance failures in any regulatory environment can significantly damage an institution's reputation and erode customer trust.
Strategies for compliance in a deregulatory environment
Leverage technology
Implement comprehensive compliance management systems to streamline processes, automate regulatory change monitoring, and document institutional responses. Utilize data analytics to identify trends and detect potential issues proactively. Develop strategies to mitigate emerging risks related to deregulation, including enhancing internal controls and monitoring capabilities.
Update your compliance program
Conduct thorough reviews of existing compliance frameworks to identify areas requiring reinforcement. Revise policies and procedures to ensure continued effectiveness in a changing regulatory landscape. Perform rigorous analysis of how deregulation may impact your institution's risk profile, with particular attention to potential state regulatory developments.
Foster a compliance culture
Secure executive leadership support for compliance initiatives to ensure adequate resourcing and organizational prioritization. Promote a culture where compliance is viewed as a shared institutional responsibility that supports both regulatory requirements and ethical treatment of customers.
Prepare for future changes
Implement scenario planning to anticipate regulatory developments and develop appropriate response strategies. Maintain productive relationships with regulatory bodies to gain timely insights on regulatory changes. Participate actively in industry associations and forums to remain informed of emerging trends and best practices.
Provide comprehensive training
Ensure staff understand the implications of regulatory changes, their compliance responsibilities, and appropriate escalation protocols. Encourage continuous professional development to maintain awareness of evolving regulatory expectations and compliance methodologies.
Changing Supervision
Leadership transitions at federal regulatory agencies have significant implications for banking supervision. New agency leadership typically brings shifts in regulatory priorities, enforcement approaches, and supervisory guidance. These changes can affect how regulations are interpreted and enforced, potentially necessitating adjustments to compliance programs, staff training, and technology investments.
During transitional periods, compliance professionals must remain particularly vigilant, staying informed of emerging priorities and prepared to adapt quickly to new expectations. Simultaneously, leadership should be regularly briefed on significant regulatory developments and their potential business impact.
Emerging trends, particularly in fintech and digital banking, will likely influence regulatory approaches, with agencies increasingly employing technology and data analytics to evaluate compliance risks more effectively.
Lessons from Historical Deregulation
Historical precedent demonstrates that deregulation often exposes weaknesses in risk management frameworks and can contribute to financial instability. Notable examples include the Savings and Loan Crisis of the 1980s, the Financial Crisis of 2008-2009, and the Bank Failures of 2023. These events illustrate the complex and frequently unintended consequences of deregulation, underscoring the importance of maintaining robust compliance programs and risk management systems even as formal requirements are reduced.
Looking Forward
The pace and complexity of regulatory change necessitate technology-enabled compliance solutions. As federal deregulation proceeds, state regulators will likely implement additional requirements, particularly in consumer protection domains. New regulations governing digital assets are anticipated, while some institutions may be tempted to pursue higher-risk activities in a less restrictive environment.
Implementing centralized, automated compliance processes that document accountability helps institutions navigate regulatory transitions while avoiding the pitfalls of inadequate compliance management.
Conclusion
While the banking industry will eventually reach a new regulatory equilibrium, its precise nature remains uncertain. Automated regulatory change management provides immediate practical benefits while establishing the foundation for long-term compliance success.
Understanding deregulation as a form of regulatory change requiring structured management is essential for banking institutions. By implementing proactive strategies, leveraging appropriate technology solutions, and maintaining robust documentation practices, banks can successfully navigate regulatory transitions while upholding financial stability, regulatory compliance, and consumer protection standards.
