You Obtained This: Managing Your Subsequent Examination


By Mark Dabertin and Tom Pareigat

Bank examinations, holding firm inspections and different “supervisory occasions” could be a supply of tension and dread for many who work within the banking trade. Very like a medical examination (or maybe extra like a root canal!), the financial institution examination course of may be hectic for the financial institution and its employees. And understandably so. It’s by no means nice to be poked and prodded and questioned about your well being and wellness. And it’s even worse when check outcomes come again with unfavorable information.

This text initially appeared as the duvet story within the March/April 2020 problem of ABA Financial institution Compliance journal.

Examinations may be particularly hectic for compliance employees. That’s as a result of the financial institution’s compliance and threat administration perform is most undoubtedly beneath the microscope through the examination course of. Federal and state regulators are obligated to conduct a sequence of exams with a purpose to consider how nicely the financial institution is implementing its system of inside threat controls to make sure that the financial institution’s board and administration are working the financial institution in a secure and sound method. Federal regulators should additionally verify that the financial institution is complying with shopper safety legal guidelines and laws. As a result of threat administration ideas of security and soundness and shopper safety are on the coronary heart of the compliance perform, the stress is on throughout examination time.

The excellent news is that financial institution administration does have the capability to handle the examination course of and favorably affect the general examination expertise from the financial institution’s perspective. This text supplies some steering in methods to greatest put together your self and your employees in your subsequent supervisory occasion.

How a financial institution can ‘handle’ an examination

As outlined in Webster’s Dictionary, to “handle” means “to deal with or direct with a level of talent: similar to: (a) to make and maintain compliant; (b) to deal with with care; or (c) to train government, administrative, and supervisory route.” Though your regulator in the end calls the photographs and oversees the examination with an appointed “examiner-in-charge,” financial institution administration can, and may, search to handle the examination from the financial institution’s perspective.
Federal banking regulators have their very own blueprint for examination requirements. The overall theme throughout the varied regulatory companies and forms of examinations is that the aim of the examination course of is to evaluate whether or not the financial institution has a sound threat administration system consisting of insurance policies, processes, personnel, and management techniques to measure, monitor, and management threat.

Compliance officers and senior administration can start to handle the method successfully by considering strategically about methods to greatest talk the standard of financial institution’s threat administration techniques in order that examiners are capable of meet their required aims. It will require some front-end preparation and inside collaboration. It’s going to additionally require some clear messaging and efficient communication with area examiners through the examination itself.

Pre-exam administration concerns

Consider the first-day letter and request record. In lots of instances, the examination request record will embrace a set of ordinary gadgets which have been offered throughout previous examinations. You’ll want to evaluation the record and establish any new or particular requests not beforehand included. A centralized method to gathering and reviewing all responsive supplies previous to submission is crucial. For requested gadgets that appear complicated, don’t hesitate to succeed in out to your examiner contact for clarification.

Perceive your org chart and authority constructions. In line with the adage, “the precise hand must know what the left hand is doing,” it’s essential that every worker who interfaces with examiners has an excellent understanding of not solely their very own place inside the financial institution, however how his/her function interfaces with different elements of the group. Nothing raises pink flags extra shortly than workers who appear unable to articulate their function, its obligations and its limitations when it comes to authority and management. Whereas threat administration and compliance are technically everybody’s job—it’s essential to make clear who does what inside your management framework and make certain all are on the identical web page. Have discussions nicely forward of the examination to make sure all are on the identical web page.

Circle the wagons. Deliver collectively related employees for the aim of completely vetting what will probably be advised to the examiners and the important thing info that will probably be shared with examiners through the preliminary assembly. It will assist resolve any materials variations in understanding amongst employees and/or practical areas and can scale back the chance of offering inconsistent info. Additionally, use this time to make clear fundamental protocol and logistics similar to:

  • Figuring out a main financial institution contact to supervise the examination occasion.
  • Confirming the place examiners will probably be situated inside your facility and the way constructing and knowledge entry will probably be dealt with.
  • Figuring out key subject-matter specialists and the way conferences by and between examiners and SMEs will probably be scheduled.

Moreover, collaborate internally concerning how on-site examination requests will probably be fulfilled. It is strongly recommended that examination requests be centrally tracked and recorded so responses to examiners are well timed and correct.

Know the relevant company steering. Past understanding the regulation and the financial institution’s coverage necessities, reviewing the present financial institution company steering, together with the relevant examination procedures, must be thought-about an important a part of examination preparation. In September 2018, federal banking regulators issued a Assertion Reaffirming the Position of Supervisory Steering. The assertion clarifies that supervisory steering doesn’t have the power and impact of regulation, and won’t be the idea of a proper enforcement motion. Nonetheless, it additionally reminds us that supervisory steering can define the companies’ supervisory expectations or priorities and articulate the companies’ normal views concerning applicable practices for a given topic space. Demonstrating in-depth information of company steering in conversations with the examiners ought to instill confidence with examiners that financial institution administration is aware of what’s required and is due to this fact extra more likely to insist on sustaining applicable controls. As well as, having such information allows administration to drive the dialog by proactively drawing consideration to essentially the most germane elements of the financial institution’s threat administration techniques.

Charting the course: preliminary interactions with the examination staff

Request an replace assembly with area examiners. Earlier than the examination begins, attain out to the EIC and request the chance to supply the onsite examination staff with an outline of the financial institution and actions taken for the reason that prior examination, with a give attention to the financial institution’s system of inside controls. Whether or not the main target of the examination is compliance, security and soundness, or a extra focused evaluation of a selected space (similar to anti-money laundering or honest lending compliance), it’s essential for financial institution administration to have the ability to successfully describe for the examiners the system of built-in controls the financial institution depends upon for functions of complying with the relevant necessities. By clearly explaining how compliance is achieved and maintained, you possibly can positively handle the examination by charting the route the examiners are more likely to pursue in confirming the existence of applicable controls.

Contemplate a ‘that was then . . . that is now’ method. Use the opening assembly with examiners to supply context on how the financial institution has progressed and improved for the reason that prior examination interval. Since most examinations cowl a definite time frame, make sure you current info that clearly demonstrates how and when prior examination findings and suggestions have been addressed and resolved through the examination interval. Needless to say most exam-related paperwork will have already got been offered in response to the “first-day” letter. Use this chance to orient the examination staff to the important thing paperwork you will have offered. Offering this context will drastically assist examiners once they start to use their prescribed examination procedures.

Maintain it actual. Affirmatively acknowledge these gadgets nonetheless in progress, or continued areas for enchancment. Keep away from puffery that means a previous discovering has been totally addressed when, the truth is, it has not. The sort of posturing calls into query not solely the integrity of administration, but in addition might trigger regulators to query administration’s capability to know efficient threat mitigation. The most effective follow is to acknowledge proactively the true standing of any prior examination findings and suggestions. The place an merchandise stays in course of, clarify the deliberate timeline for completion and supply context round actions being taken so examiners can verify it’s a key precedence.

Spotlight inside management practices. Needless to say through the course of an examination, regulators’ main focus is to guage the important thing controls in place to deal with and maintain regulatory adherence by assessing the design and operational effectiveness of controls. Widespread pitfalls related to describing a financial institution’s related controls to examiners typically relate to administration’s incapability to exhibit adequately, within the type of written insurance policies, procedures, and/or ongoing enterprise reporting, that the claimed system for sustaining compliance (1) exists, and (2) is being adopted. In brief, make certain the content material of your preliminary discussions with examiners speaks clearly about your key controls and the way they’re documented and applied.

Keep centered on examination scope. Relying on the scope and goal of the examination, make sure you tailor the financial institution’s early interactions to the related areas of evaluation. For instance, at first of a security and soundness examination, essentially the most related presentation could be administration’s personal evaluation of how the financial institution measures up beneath every part of the CAMELS scores. An preliminary presentation at first of a shopper compliance examination would most definitely warrant a evaluation of how the financial institution implements the important thing necessities of its compliance administration system. Keep away from fogging up preliminary conferences with irrelevant, self-serving knowledge not germane to the scope and goal of the supervisory occasion. And keep in mind, it’s all the time higher for administration to acknowledge the necessity to additional strengthen controls than to overstate the standard and effectiveness of the controls that at present exist.

Sensible concerns through the examination

Openness is crucial. The outdated saying, “inform the examiners as little as potential,” isn’t a sound examination technique. To this finish, the civil cash penalty matrix contained within the OCC’s Coverage and Process Guide, which is utilized by that company in figuring out the appropriateness and quantity of civil penalty assessments, treats “concealment” because the second most weighty destructive issue after “intent” out of a complete of ten elements. In June 2013, the CFPB printed Bulletin 2013-06 (Accountable Enterprise Conduct: Self-Policing, Self-Reporting, Remediation, and Cooperation—a doc that was revised and reissued in March 2020), which explains the significance of open communications and the circumstances beneath which that company could also be keen to deal with what it refers to collectively as “accountable conduct” as a positive think about resolving a possible or present enforcement. Backside line, transparency is the very best method. However please learn the following paragraph.

Keep away from guesswork when interfacing with examiners. Some workers mistakenly imagine they should know all and inform all when talking with examiners. This typically ends in speculating on issues exterior of the worker’s scope of information or authority. Remind financial institution employees that if they’re questioned about issues which they know nothing about, they need to defer to the SME, and reply with a easy “I don’t know the reply to that particular query—however let me put you in contact with the precise individual.”

Reply to points through the examination. Together with being clear through the examination course of, administration ought to try to keep up shut communications with the examiners all through the length of the examination. Whereas it might appear tedious, every day dialogue with the examiners is advisable. It permits for examiner misunderstandings to be cleared up early and informally—somewhat than have them hit a extra formal preliminary points record. Additionally, studying about any bona fide points early on will permit administration to vet its remediation plans with the examiners, and doubtlessly implement sure remedial actions earlier than the ultimate examination report is written.

Handle your expectations

Needless to say the examination course of is meant not solely to validate and make sure the Financial institution’s efforts, but in addition to establish and suggest enhancements and enhancements primarily based on an ever-changing trade. Ultimately, a “favorable” examination consequence doesn’t imply that no points have been recognized, or no regulatory issues have been raised. That’s not an affordable expectation in an trade ruled by each goal and subjective requirements of analysis. However with a well-organized and proactive plan to organize for and actively talk the financial institution’s enhancing inside management surroundings, a positive consequence will probably be administration’s skill be taught from the examination expertise, strengthen its supervisory relationships, and in the end enhance the standard and effectiveness of the financial institution’s threat and management surroundings and compliance constructions.

Mark T. Dabertin is particular counsel within the monetary companies follow group of the regulation agency Pepper Hamilton, resident within the Berwyn, Pennsylvania, workplace. He has over 25 years of broad-based expertise in monetary companies regulation and regulatory compliance. Thomas G. Pariegat is EVP and normal counsel on the Bancorp, Inc., headquartered in Wilmington, Delaware. He has been training regulation since 1984 and has over 30 years of shopper safety and regulatory compliance expertise. He serves on the ABA Financial institution Compliance editorial advisory board.


Supply hyperlink