In the first instalment of this series, we discussed the steps to take internally when an examination results in unexpected criticism and or findings. We noted that it is important to identify and fully understand the criticism/finding from the point of view of regulatory requirements that have been missed. Further, understanding what remedies exist that are actionable is important. Finally, we noted that identifying the root of the problem and documenting the efforts to address the concern are important steps to effectively addressing an examination with negative results. For the most part, these steps are internal to your institutions. There are also external steps that you can take to minimize the impacts of a bad review.
Pushing Back
There are times when an examiner has a unique interpretation of the regulatory requirements of a regulation. For example, the FFIEC manual makes it clear that the decision to file a SAR is in ultimately left to the institution based on all facts and documents available in a given transaction. Nevertheless, there have been many instances where regulators cited a violation and directed an institution to file a SAR. As a best practice, an institution’s management can seek specific clarification on the authority being asserted to order a SAR. It is fair to ask for evidence and specific citations that are the basis for the finding. It is further fair for an institution to push back and present the case in disagreement with a finding. This in no way is meant to imply that the decision not to file a SAR will always be a defense to a finding. However, seeking clarity about the support for the finding and presenting counter arguments can be a very effective response.
In many cases, failure to push back can be taken as acquiescence and/or agreement. Once a finding has become finalized, it can “take on a life of its own” and even become a repeat finding that leads to enforcement action. Management’s documented disagreement and the reasons for the disagreement can be valuable should the matter ultimately need further resolution.
Promise what you can actually do
When speaking to regulator about plans to address findings or concerns, be careful to promise only that which Is reasonable and achievable. There is a tendency to want to promise that all problems noted in an examination can be fixed in a short amount of time and without much effort. Just remember that the examiners expect that what is promised will be delivered and in the time frame indicated. Making adjustments to operations and internal controls has to be accomplished while continuing operations. Therefore, it is important to be realistic about the time frame for a resolution to a problem. As we noted before, determining the root cause of an issue and documenting the proper remedy can take time. A rushed response may result in further complications and the need to start over.
Be proactive about contacting regulators
For too many institutions, once an examination is complete, there is a response, an acknowledgement of the response and very little communication until the next examination. However, there is no prohibition on contacting regulators to ask questions, seek advice and share ongoing results between examinations periods. It can be extremely frustrating to develop a whole of services or products, only to find that the examination team has significant concerns with the introduction of the new items. Regulators are not businesspeople, and they will not generally recommend specific vendors, butt they will make suggestions about important considerations before a company invests its time and resources in an area. It is generally a good idea to keep lines of communication open between your institution and its regulators.
Develop a reputation for responsiveness
As we have noted, it Is acceptable to push back against findings that are controversial. We also have suggested prudence in making promises to address concerns in a timely manner. The key component here is making sure that the management team of your institution responds to concerns in a manner that is directly related to the issue noted. It is equally important that the response is robust and sends the signal that the concern is being taken seriously whether there is agreement or not. For example, if the concern is that training is not adequate, then the respo0nse must include steps being taken to obtain significantly improved training in the areas of concern. The management answer that notes training will be increased without noting the specifics of the training is not particularly responsive. It is a best practice to note the concern and address it directly.
Push for an upgrade
Once the root causes of concerns have been identified and directly addressed, there is no time to waste in asking for an upgrade rating. This is especially true in cases such as enforcement actions that have been made public. These actions can negatively impact banking relationships, reputation and regulatory fees. The sooner a resolution, the better.
***James DeFrantz is Principal at VCM
For More Information please visit www.VCM4you.com ***