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How Important is Compliance Management?

We have been talking about "managing compliance" or compliance "management" for some years. Those of us who do it - who manage compliance - know what it is. But when we try to explain our work to others, we find that the concepts are not readily understood. How many times have you tried to explain what a "compliance program" is?

Why does the world of non-compliance managers have such difficulty understanding us and what we do? And, perhaps most important, why don't they appreciate us?

There are really two philosophies to compliance management. The first could be described as preventative. The bank establishes systems and procedures to prevent compliance errors from happening. Compliance is integrated into the bank's procedures to ensure that violations do not occur. This is the compliance manager's ideal.

The second approach to compliance is "find it and fix it." This method involves using monitoring or audit techniques to find violations after they occur and then correcting them. The compliance manager functions like a repair service, fixing things that are broken.

Both methods require time and money. However, the costs to the bank of each method can differ radically. A commitment of resources to a preventative method compliance program can be significant but the advantages of the preventative approach are powerful. First, the costs are known in advance and can be taken into account in planning and budgeting. Second, it delivers results. A good compliance program should equate with a good compliance examination rating.

Now compare the "find it and fix it" approach, one popular with many bank management teams. It has the attraction of seeming cheaper. In budgeting, fewer resources are put into compliance. At the cutting table, it is easy to justify a reduction in a cost center such as compliance.

Have these "find it and fix it" banks ever evaluated the true cost of this method? The true costs are unpredictable because the true costs of this method will be the price tag attached to what goes wrong - something the "find it and fix it" bank now lacks the resources to predict or control.

The true costs of this method are not the actual costs going into the compliance program (or lack thereof). The true costs of this approach are the costs of violations and corrective actions - and penalties. The corrective action costs could be low. For example, there could be some clerical or timing errors involving adverse action notices, or the occasional omission of a settlement service on a Good Faith Estimate. Sending corrected notices may not seem terribly burdensome.

But other violations can have a serious price tag. A bank that makes errors in Truth in Lending disclosures on adjustable rate mortgages may pay more in restitution than the it would have paid in salary and benefits for a compliance manager who could have prevented the violation.

Inadequately trained tellers may make mistakes - or worse -with Currency Transaction Reports that trigger civil penalties large enough to cover the bank's entire payroll for months.

Failures to identify and require flood insurance on properties in flood hazard areas could leave a bank holding title to "improved" property that is no longer there - or under vast amounts of mud and water.In light of these possibilities, how much of a bargain is the "find it and fix it" method? Clearly, committing the resources necessary for preventative compliance can be the most cost effective method in the long view.

As Century National Bank can testify, there are more benefits than costs to a good compliance program. Getting compliance right has ramifications beyond the costs of corrective action. Getting compliance right enables the bank to take charge of its future. Growth and expansion may depend on compliance. Administered properly, a good compliance program helps to support positive management environment. Finally, getting compliance right can support employee morale. A good compliance program can help bank employees do their job better and get results that everyone can take pride in - including your customers.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 5, 3/96

First published on 03/01/1996

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