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Compliance Review and Tactics

With 2021 in the rearview and 2022 well underway, it’s a good time to consider some compliance issues from last year, and current trends and tactics for keeping ahead of regulators this year. In 2021, we saw a number of compliance-related changes from the Federal Financial Institutions Examination Council’s (FFIEC) and Federal Deposit Insurance Corporation (FDIC). One important development, especially for smaller community banks and credit unions, was the FDIC’s new Office for Supervisory Appeals. The office—launched in December to operate independently within the FDIC—considers and decides appeals of material supervisory determinations. It replaces the existing Supervision Appeals Review Committee.

The Office of Supervisory Appeals will “enhance the independence of the FDIC’s supervisory appeals process and further the FDIC’s goal of ensuring consistency and accountability in the examination process,” according to the FDIC. There’s a broad range of material supervisory determinations that institutions can appeal through the office, including CAMELS ratings under the Uniform Financial Institutions Rating System; IT ratings under the Uniform Rating System for Information Technology (URSIT); and Trust ratings under the Uniform Interagency Trust Rating System. This new appeal process isn’t a guarantee that supervisory findings will be changed but may prove useful as a last resort for FDIC institutions facing downgrades in scores where there is a material disagreement between the FI and the FDIC.

Another significant FFIEC development last year involved amendments to the Bank Secrecy Act (BSA) and anti-money laundering (AML) regulations. The BSA amendments included certain provisions to the USA Patriots Act to detect, deter and disrupt terrorist financing networks. This would appear to be an area of focus going forward, as 3 of the 10 most substantive (i.e., non appointment-related) FFIEC releases in 2021 were related to BSA/AML.

In June, the FFIEC issued a new Architecture, Infrastructure and Operations (AIO) booklet as part of its Information Technology Handbook. With this logical move, the FFIEC replaced its July 2004 Operations Handbook with a single booklet that merges three interconnected areas. In August the FFIEC also enhanced its guidance on authentication and access to services and systems—advocating for the widespread use of multi-factor authentication (MFA)—and released guidance on conducting due diligence on fintech companies.

One additional item of note in 2021; the FDIC’s tech lab, FDITECH, launched an initiative to challenge institutions to measure and test bank operational resiliency. Ultimately, a set of metrics may be applied to financial institutions—perhaps community banks in particular—to determine whether they are adequately resilient against operational disruptions. We’re keeping a close eye on this as it may lead to a universal formula for grading or ranking resilience. Anything that reduces subjectivity also reduces uncertainty, and that is a good thing when it comes to regulations.

Tips, Tricks, and Tactics

One of the main tactics to apply now to enhance compliance is to focus on the concept of resilience in all areas of the financial institution. Incorporate this concept into your business continuity management plan, vendor management program, third-party supply chain management, and information security. The key is to prepare in advance for a disruption—to put processes in place to reduce the possibility of disruption, and to minimize the impact of disruption should it occur.

Here’s another way to stay ahead of regulators: Financial institutions can connect the concept of risk appetite to the acceptable risk in their risk assessments. This goes beyond merely asserting that whatever residual risk you may have is deemed acceptable, which is highly subjective. Inherent risk less controls establish residual risk. However, residual risk levels must be compared to pre-determined risk appetite levels to determine acceptability. Only if the residual risk is less than or equal to their risk appetite can residual risk be considered acceptable. This process also reduces subjectivity and uncertainty—which should leave examiners and auditors much less room for interpretation, and result in a better audit/exam experience for you.

What to Consider in 2022 and Current Trends

Another area we’ll definitely be watching in 2022 involves the new incident notification rules that were issued late last year. All financial institutions will need to update their incident response plan and possibly their vendor management program and business continuity plans to accommodate these new regulations. These changes, while not necessarily difficult, can be pervasive in that they will cross over into multiple policies and procedures. In short, the rule requires institutions to notify their primary federal regulator as soon as possible—no later than 36 hours—after they determine that a notification incident has occurred. There are also new requirements for third parties to notify you if they experience a similar event, which could require changes to the vendor contract. The effective date of the new rule is April 1, 2022, with compliance expected to begin on May 1, 2022. There may be a grace period, but financial institutions should be prepared for examiners to ask questions about your adherence to these new rules at your next Safety and Soundness exam.

Regarding trends, we believe the focus on third-party risk management will continue in 2022 and into the future. Currently, there’s growing support for the idea of having the FDIC, Federal Reserve, National Credit Union Administration (NCUA) and other agencies coalesce around a single set of standards for third-party management. This would create more consistency with the rules concerning how regulators and others define third parties and vendors, and expectations for effective risk management. The outcome of the discussions around this topic may not manifest until Q3 or Q4 of this year, but institutions should work on formalizing their process for conducting due diligence when dealing with fintech companies and other critical vendors.

Safe Systems has been serving financial institutions for more than 25 years. To get more of our experts’ views on this topic, listen to our webinar on “Compliance Review and Tips, Tricks, and Trends for Staying Ahead of Regulators in 2022.”

Building a Pandemic Response Plan

As COVID-19 continues to spread around the world, financial institutions have been forced to respond to this pandemic in new and innovative ways to stop the spread of the virus; protect their employees and the public; and keep their doors open and operations running smoothly to serve their customers and members. Community banks and credit unions are referencing the Pandemic sections of their business continuity management plans to determine the best way forward for their institutions during this challenging time. With the Federal Financial Institution Examination Council’s (FFIEC) recent business continuity management (BCM) guidance, many financial institutions are first of all wondering what has changed in the guidance, and second what specific additional changes this particular event might require.

Pandemic Planning

Since 2007, financial institutions were required to have a separate pandemic plan, and regulators only looked for documentation that institutions were testing their plans periodically. Unfortunately, the pandemic section of the business continuity plan (BCP) has tended to be treated as more of an afterthought since these situations have historically occurred much less often than natural disasters or other business interruptions. If they were assessed at all, they fell into the category of a high impact, low probability event.

Notwithstanding COVID-19, pandemics are still low probability events, but the impact of these events may be far more significant than past risk assessments have indicated. In what may now be perceived as an untimely move, the FFIEC made the decision in the 2019 BCM update to deemphasize Pandemic by categorizing it the same as any other disruptive event. The FFIEC no longer requires financial institutions to have a separate pandemic plan, but instead expects community banks and credit unions to assess and manage pandemic risk alongside all other possible disasters.

In other words, your BCM plan is your pandemic plan, and you must analyze the impact a pandemic can have on your organization; determine recovery time objectives (RTOs); and build out a recovery plan. You must also include a methodology to determine the key triggers your organization will use to activate your recovery plan when faced with a pandemic. But when should you activate your recovery plan and who is in charge of this process?

Pandemic Response

Before a recovery plan is activated, it is important to have an initial response team (typically comprised of C-Level executives) evaluate the situation and assess the potential impact of the current event on the institution. The team must determine if the situation is likely to negatively impact the institution’s ability to provide products and services to their customers or members beyond the established recovery time objectives outlined in the BCM plan.

The same rules apply in a pandemic. Community financial institutions should use the six pandemic phases outlined by the World Health Organization (WHO) or the Center for Disease Control (CDC) to evaluate the severity of the situation.

In most cases, the pandemic portion of the plan is not triggered for activation until phases 4-5 (or if between 20-40% of your workforce is not available to work).

What Regulators Expect

During a pandemic, regulators expect financial institutions to continue offering products and services to customers/members and conduct operations as normally as possible. This underscores the importance of including succession planning and cross training in the BCM plan. In the past, assumptions used to simulate a pandemic were that phases 4-5 wouldn’t last more than a week or two, so most financial institutions may only have planned for one person to be identified and pre-trained to step into a critical role until the event was over. However, the COVID-19 pandemic is a global crisis currently impacting at least 183 countries and territories and is predicted to impact many more people, and take much more time to contain.

To ensure critical functions continue, financial institutions should have at least two or three alternate staff members trained for every primary resource within the institution and assess whether some roles can be performed remotely. This can be difficult for smaller institutions with limited staff and resources. For specialized functions dominated by key personnel, such as funds management, wire services, human resources, etc., these institutions may not have multiple alternatives to step in if key employees are unavailable. In these circumstances, you may need to have other cross-trained staff members identified who can step into these roles quickly.

Next Steps: Lessons Learned

There will be many more lessons learned after the COVID-19 pandemic has passed, and regulators will expect those lessons to be reflected in your plan. When all is said and done, regulators are likely to ask “what have you learned from this event, and what have you done to enhance your pandemic plan based on those lessons learned?” Prior to this event, had you analyzed your business processes and their interdependencies, and prioritized them by recovery time? Since interdependencies include employees, and pandemic events almost exclusively impact personnel, have you identified employees with job duties capable of being performed remotely? If so, did they have secure, reliable, remote access? If those job duties are highly specialized, or highly critical, did you have alternate personnel identified and pre-trained to step in when needed?

The answers to these questions, and many more, will be used to enhance the pandemic section of your BCM plans, but until we reach that post-event, lessons-learned point, it’s important for financial institutions to continue to reference their business continuity plans; document the entire process; keep stakeholders informed; and put measures in place to continue serving their customers and members and protecting their employees and the public.

For more information on pandemic response, view our pandemic resource center. Or, if you would like to make sure your BCM is up to date, please request a complimentary plan review to ensure that your business continuity management plan is keeping up with changing regulations.

View Our Pandemic Resources

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2021 Compliance Review and Tactics for Staying Ahead of Regulators in 2022