Like the better-known key performance indicators (KPIs) and key risk indicators (KRIs), keycompliance indicators (or KCIs) are metrics that help financial institutions achieve sustainablegrowth.
KCIs give financial institutions an indication of when to take corrective action before issues are revealed during a compliance review or exam. FIs can set compliance thresholds to determine if there’s a material change in their compliance risk.
KCIs play a pivotal role in preemptively spotting compliance risks before they necessitate immediate remediation. Their importance escalates as regulatory demands grow, requiring financial institutions to reevaluate their compliance frameworks.
The proactive detection of compliance risks with KCIs enables financial institutions to:
Adhere to Regulatory Standards: In periods marked by regulatory uncertainty, it becomes crucial for FIs to monitor compliance regulations and guidance.
Guide Strategic Objectives: Grasping the compliance implications of introducing new products or expanding banking services is key to ensuring that strategic initiatives align with regulatory requirements.
Safeguard Against Monetary Damages: Compliance damages can stem from penalties and fines, legal disputes, or diminished consumer trust.
Boost Operational Efficiency: Identifying compliance deficiencies allows FIs to refine procedures, bolster controls, and minimize the risk of operational failures.
Using KCIs equips financial institutions to manage compliance risks proactively, thereby avoiding the costs associated with expensive remediation.
Below is a list of some of the KCIs your institution should measure:
1. Consumer Complaints – While some consumers believe their complaints vanish into thin air, agencies say otherwise. For instance, the Consumer Financial Protection Bureau considers consumer complaints crucial to its regulatory efforts, viewing them as a direct line in identifying possible compliance issues.
What approach does your financial institution take toward monitoring complaints? It’s not enough to merely tally complaints. You need detailed strategies to monitor feedback across different branches and for various products and services. Effectively handling consumer feedback involves understanding the root cause of consumer dissatisfaction, not just that consumers are dissatisfied.
2. Compliance Findings – When you uncover a compliance issue, whether through an internal review, external audit, or regulatory exam, the speed and thoroughness in addressing the issue is critical. Did you discover the fundamental reason for the issue? Financial institutions must drill down to the core reasons in compliance findings rather than simply treating surface-level symptoms.
If the analysis of your findings repeatedly reveals the same issues, it signifies a failure to identify and address the underlying cause. Effective findings management involves implementing corrective action that averts future compliance problems – don't just apply a temporary fix but seek a permanent solution for your findings.
3. Employee Training – Provide your staff with the necessary resources to adhere to relevant laws and regulations. Compliance training should include the entire institution, tailored to each employee's specific roles and responsibilities.
4. Third-Party Compliance – The latest Interagency Guidance on Third-Party Relationships: Risk Management underscores the accountability of banks in managing third-party vendor risk. This guidance emphasizes the importance of having a solid third-party risk management (TPRM) program.
5. Regulatory Changes – With new regulations set to take effect in 2024, financial institutions must assess and measure their impact. The effectiveness of regulatory change management in your institution’s policies, training materials, and systems upgrades is critically important.
6. Accuracy of HMDA and CRA Reporting – Is there consistency between your Loan Origination System (LOS) data and what you report in the Loan Application Register (LAR)? It’s essential for financial institutions to regularly scrub HMDA data for inaccuracies and rectify them before filing with the CFPB.
7. Managing Exceptions – Offering preferential treatment to certain loan applicants could violate fair lending laws.
8. Ensuring Equitable Banking Access – Financial institutions must ensure that banking services are accessible to every consumer within their geographic area, as determined by facility-based assessment areas.
9. Fair and Inclusive Marketing Practices – Marketing efforts that exclude or preferentially target certain groups over others can lead to disparities in both digital and print media. Specifically, focusing marketing efforts on select demographic groups might violate the Equal Credit Opportunity Act (ECOA).
Financial institutions must oversee marketing strategies, ensuring that targeted mailings, imagery, language, and online algorithms and geographic filters do not result in discrimination.
Delaying identifying compliance issues until external auditors or examiners discover them puts your institution in a precarious position. When such a situation arises, your institution will be forced into a reactive stance, hurriedly addressing costly compliance errors that could have been effectively mitigated earlier at significantly less expense.
By customizing your compliance risk categories and KCIs, your institution can stay on top of regulatory change, allocating resources more efficiently to grow your institution.
Robert Brosh is always up to date on the latest federal regulatory changes facing financial institutions—and knows what to do to comply with them. From regulatory summaries, analyses and action plans to audit templates and risk assessments, Mr. Brosh easily breaks down regulations into their key components and communicates the essential information to financial institutions clamoring to understand the implications. Prior to working at Ncontracts, Mr. Brosh interned at NAFCU and the Office of Financial Research at the Department of the Treasury. He received his J.D. at the Antonin Scalia Law School at George Mason University.