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When one thinks of ‘compliance’ often words like ‘mandatory’ or ‘required’ follow. Institutions are either ‘in compliance’ or ‘out of compliance.’ Only considering compliance in this way is not only limiting but also laden with obligation and angst. However, there is a ‘softer side’ to compliance. It is the softer side of compliance that may play a large role in the foreshadowed financial deregulation expected with the new administration, as financial institutions who are relieved of certain legal requirements decide to continue to comply with them. The process for promulgating new rules typically include:

  • proposals,
  • hearings,
  • draft rules,
  • comment periods,
  • final rule,
  • announcement of rule effective date, and
  • date of expected compliance.

At a minimum, months separate each of phase of this rule-making process. Nevertheless, once it is clear a rule is on the horizon and the scope is more or less defined, financial institutions may decide to get a head start by complying in advance of the rule’s promulgation.

Voluntary compliance has many benefits. One, it signals to the regulators that the institution is serious about compliance.  Two, it positions the institution to become a source of best practices. Three, it provides the institution’s employees and management teams with lead time to adjust to the legal requirements and provides more time for developing and fine-tuning the necessary new processes that the new regulation will require. In sum, voluntarily complying in advance has a number of significant benefits.

Similarly, some new regulations may only apply to certain financial institutions but not to others. The reasons for this are many, for example:

  • The industry class is exempt.
  • The institutional size, asset level, geographic location, or other trait do not meet the applicability requirement.
  • This is a low compliance risk for the institution type.
  • Implementation of the new rule will be phased over time.

In these cases, although not obligated to comply, a financial institution may decide to voluntarily comply because it fits with its business strategy, addresses constituent concerns (such as the board of directors or investors), aligns well with the institution’s brand, or reflects ‘good corporate citizenship,’ to name a few. Voluntary compliance can also be touted as a best practice and provide the financial institution with a basis for enhancing its value proposition, thereby strengthening its competitive edge.

Compliance is good for business whether it is mandatory or voluntary. However, taking a proactive approach to compliance can take the some of the edge off and loosen internal resistance will yielding positive organizational and strategic benefits.

Sheryl Smikle PhD

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