Operational Outlook


Incorporating regulation and compliance into strategic planning and action

By Karen Epper Hoffman

Complying with regulations is more than just an everyday task for community banks. It has become a full-fledged strategic issue—an all-important ingredient in how a bank can operate efficiently, grow its bottom line, and develop innovative products and services.

“Strategic planning has been the focus of the regulators for several years now, and regulation and compliance is an integral part of that strategic planning,” says Cathy Ghiglieri, president of Austin, Texas-based consultancy Ghiglieri & Co.  

Charlie R. Cameron, principal in the financial institutions group at the consulting firm CliftonLarsonAllen LLP, says compliance has become more of a strategic issue for community banks in recent years for several reasons, ranging from an industrywide shortage of personnel with strong compliance backgrounds to the impact of new regulations on introducing or expanding key product lines (such as a home equity line of credit). They also include the potential negative impact noncompliance can have to stymie strategic growth initiatives, such as introducing new products, opening new branches or engaging in acquisitions.

As Jim Adkins, managing partner for the regulatory consulting firm Artisan Advisors LLC of Barrington, Ill., points out, “Any time regulators see a bank going into a new market or offering a new product, they are going to be concerned that you know what you’re doing from a compliance and risk standpoint.”

“Any time regulators see a bank going into a new market or offering a new product, they are going to be concerned that you know what you’re doing from a compliance and risk standpoint.”
—Jim Adkins, regulatory consultant

Planning for compliance
New legislation, regulations and compliance in general are receiving increased attention as banks consider their strategic initiatives in the areas of growth, profitability improvement and possible market expansion, Cameron points out. For example, when it comes to organic growth, he says the regulatory burden of compliance is impacting the processes and speed of rollout of new initiatives. Similarly, the application of fair lending laws and Community Reinvestment Act compliance issues in recent years could delay a community bank’s market expansion plans or deny them altogether.

“If you’re dealing with all that [regulatory burden and complexity], it forces you to take your eye off the ball, and it takes away from your ability to focus on running the bank,” says Jim Kleinfelter, former president of the consulting firm Young & Associates in Kent, Ohio, and now president and CEO of Geauga Savings Bank in Newbury, Ohio.

In light of a host of new and increasingly complex compliance rules, community banks need to be much more cognizant of regulations that hinder their growth and broader goals, says Ann M. Brode, owner and managing consultant for Brode Consulting Services Inc. in Ravenna, Ohio. “In the past, as banks would come up with new initiatives, the directors or senior managers could just decide to hit the go button,” she adds.

Growth and products
Cameron says that all strategic initiatives should include a comprehensive review of the impact of regulations on the activities. The review should encompass the development of policies, processes, controls and training programs to deal with applicable laws, rules and regulations, he says.

Ghiglieri agrees that new offerings need to be analyzed more carefully in light of compliance issues. “For each new product or service, banks should be analyzing staffing requirements, expertise, and costs, along with regulatory or compliance requirements, prior to making them available to customers,” she says. “And new products and services are a part of any strategic planning process.”

In light of these increased pressures, community banks need to incorporate compliance into their strategic planning efforts now, if they have not been doing so already, Adkins advises. Recommending what he calls the “AIP approach,” he says community banks should assess the current state of their compliance, improve areas that require improvement, and prepare for where the bank needs to go to grow.

“Bring the compliance professionals into the strategic planning process right away,” he adds. “You need to have them at the table from day one.”

Adkins suggests that community banks pay special attention to “hot buttons” that will put them on regulators’ radar and could trigger costly, enervating and distracting regulatory obstacles to strategic efforts. He advises banks to be particularly aware of potential compliance risk in their dealings with financial technology startups and in managing other third-party vendor relationships.

“A lot of community banks are hurting for loans and some are trying to be creative,” which may pull regulators’ concern, he says. “They’ll want to know what you’re doing, if [the vendor] is stable, and who to hold accountable if they need to.”

Karen Epper Hoffman is a financial writer in Washington state.