Regulatory exams can be daunting to those that are unprepared and uninformed about the process. Regulated entities that want to perform well in an exam often seek assistance from third-party vendors to conduct mock reviews and to help them prepare for the examination.
Your organization may be subject to many examinations by various regulatory agencies throughout the year. Because these examinations can occur at any time and sometimes with little lead time, it is important to plan your organization’s overall approach to the examination process in advance. This preparation allows for better coordination and understanding among your staff of what is required in an examination and increases the likelihood of a better outcome while mitigating any disruption to your day-to-day business operations. Effective examination management builds creditability with the regulator, establishes a positive tone at the onset of the exam and provides continuity during the examination process.
Plan, Schedule, Execute
Once notified of an exam, your organization should create an examination plan immediately. The appointment of a staff liaison will help to facilitate requests and coordinate communication with the examination team. This individual or team will be a critical component in ensuring that requested examination materials are completed and provided in a timely manner.
In preparation for an examination, it is very helpful to hold simulated meetings with the leadership team and staff. This training will prove beneficial especially for those who are not familiar with the process and with interacting with examiners.
An entrance or “kick-off” meeting with the examination team should be organized to allow for proper introductions and presentations. It is important to include key members of your management team and the regulatory liaison at this meeting to establish a solid rapport and maintain open communication during the process. In addition to the regulatory liaison, it is essential to identify key personnel who will interface with the examiners and prepare all staff who may incidentally engage with them. As indicated above, this is particularly helpful for individuals who may be interviewed but not accustomed to dealing with examiners. Preparation is also important when the scope of the examination will impact various operation sites. Each functional area should go through similar preparation activities, which is also a good way to check for any inconsistent procedures or practices.
The Consumer Financial Protection Bureau (CFPB) has provided institutions with a readiness guide and a set of interim examination procedures to guide compliance with their examination standards. Along with the CFPB, other regulatory agency handbooks provide guidance to areas that are under review.
Doing More than the Minimum
In the aftermath of the financial crisis, heightened expectations have been placed on financial service organizations by their regulator. These expectations ensure that strong oversight and effective risk and control systems are in place throughout the organization. One best practice to determine the effectiveness of an organization’s risk control system is to engage in regular self-assessments and compliance audits. This demonstrates to the regulators that the examination is not the only control and compliance checkpoint. Self-assessments and audits should be scheduled and conducted in a timely fashion with findings reported directly to senior management and to the board or respective risk committee of the board. Prompt reporting ensures that all sides are on the same page with respect to the organization’s issues and opportunities for improvement, ability to adhere to regulatory requirements and remediation of past issues. Examiners will be particularly focused on any issues that were raised in a previous examination, so your organization should have a plan of action to remediate and test to ensure prior issues have been fully addressed.
A mismanaged examination can have a negative impact on the examination process and lead to poor regulatory relationships. When selecting a third party to assist you with pre-examination preparation or post-examination remediation, gap or risk assessment preparation, self-assessments or mock audits, look for seasoned professionals with examination and enforcement experience available to assist your bank, mortgage or financial services company. Alvarez & Marsal Financial Industry Advisory Services has deep regulatory knowledge and expertise that can deliver and provide financial service companies like yours with the necessary support and assurances to help mitigate operational, compliance, regulatory and reputational risks.