Elevating Fairness in Compliance: A Strategic Imperative for Integrated Risk Management
In the dynamic landscape of modern banking, fairness is becoming a cornerstone in compliance risk management, aligning closely with the broader strategic imperatives of Integrated Risk Management (IRM). At the Consumer Bankers Association LIVE event, Acting Comptroller of the Currency Michael J. Hsu spotlighted the importance of integrating fairness into compliance activities. This approach is vital within the framework of IRM, which synergistically combines Governance, Risk Management, and Compliance (GRC) with Enterprise Risk Management (ERM), Operational Risk Management (ORM), and Technology Risk Management (TRM).
The Integration of Fairness within IRM
IRM transcends traditional risk management by incorporating GRC into the domains of ERM, ORM, and TRM, ensuring that governance and compliance are not isolated but integrated with all risk management activities. This comprehensive approach is crucial in an era where banking innovations such as digital platforms, and products like Buy Now Pay Later (BNPL) and Earned Wage Access (EWA), are rapidly evolving. These innovations, while beneficial, introduce complex compliance and operational risks that require an integrated approach to manage effectively.
Case Study: Overhauling Overdraft Practices
A poignant example of the application of fairness in compliance is seen in the evolution of bank overdraft practices. Historically, banks viewed overdraft services as convenience offerings, which morphed into significant revenue streams over time. This transformation often led to consumer financial strain due to excessive fees. Recognizing these issues, regulators including the OCC began to push for reforms around 2021, advocating for banks to adopt more consumer-friendly practices. Banks that proactively embraced fairness in their overdraft policies not only aligned with regulatory expectations but also enhanced their customer relationships and operational resilience. This shift exemplifies how IRM, by integrating compliance with operational and technology risk management, can lead to sustainable business practices that support both institutional and customer well-being.
Addressing Compliance Challenges through IRM
The rapid introduction of financial products like BNPL and EWA presents new compliance challenges. BNPL, for instance, has exploded in popularity, offering consumers the ability to defer payments without traditional credit checks. However, this convenience comes with risks related to over-indebtedness and inadequate consumer protection frameworks. Effective IRM requires banks to anticipate these risks and integrate fair compliance practices from the product development phase. By doing so, banks can avoid the pitfalls experienced by early adopters of such models who faced regulatory scrutiny and consumer backlash due to aggressive practices or inadequate user safeguards.
Actionable Strategies for Banks Using IRM
Embed Fairness and IRM in Compliance Programs: Banks need to ensure that fairness and IRM principles are foundational to their compliance programs. This strategic integration helps manage risks comprehensively, fostering a culture that supports sustained compliance and governance excellence.
Proactively Address Emerging Risks through IRM: With the financial industry’s landscape continually changing, banks must use IRM to manage the compliance aspects of new products proactively. This approach enables them to address potential risks before they become systemic issues, ensuring that new offerings are both innovative and fair.
Educate and Engage Staff in IRM Principles: For IRM to be effective, all bank staff must understand its principles and how they apply to their daily responsibilities. Continuous training and development programs should focus on the practical application of IRM, emphasizing the importance of fairness in all banking processes.
Continuous Review and Dialogue with Regulators: Regular updates to compliance practices are necessary to adapt to evolving regulatory landscapes. Engaging in ongoing dialogue with regulators helps banks align their risk management practices with current and forthcoming regulations, maintaining compliance and operational integrity.
By adopting these strategies, banks not only comply with the necessary regulations but also strengthen their ability to manage risks across all domains effectively. This integrated approach ensures that they remain resilient and responsive, ready to tackle current and future challenges in the financial ecosystem, thus maintaining stability and building trust among their consumer base.
Source References:
- Hsu, Michael J. “Fairness and Effective Compliance Risk Management.” Remarks at Consumer Bankers Association (CBA) LIVE, March 25, 2024.
- Curry, Thomas J. “Remarks Before The Clearing House Annual Conference,” November 30, 2016.
- Tarullo, Daniel K. “Good Compliance, Not Mere Compliance.” Board of Governors of the Federal Reserve System, October 20, 2014.
