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Why are Enforcement Actions Way Down?

According to Continuity’s Banking Compliance Index (BCI) for the third quarter of 2016, enforcement actions against financial institutions fell to their lowest level in the three-year history of the BCI.

The rate of enforcement activity in Q3 was 6.54 percent, the first time it has been below 7 percent since the BCI was launched in 2013. The uncertainty regarding the presidential election and what effect the new president’s policies will have on the financial industry is one possible explanation for the dropoff in enforcement actions.

Another possible explanation is consolidation within the industry; in the last year, 290 banks have either merged with other institutions or consolidated (or closed), leaving regulators with fewer financial institutions to oversee. According to Continuity, regulators often focused on the larger institutions in Q3 which required greater enforcement resources and supervision—leaving regulators with fewer resources for the smaller institutions.

Still another factor in the decline in enforcement actions, Continuity reported, may stem from criticism and litigation involving the Consumer Financial Protection Bureau (CFPB)’s enforcement actions. Continuity says regulators may be exercising more caution when determining whether or not to hand out punishment to a financial institution. On October 11, a federal appeals court ruled that the CFPB’s structure was “unconstitutional” and removed a $109 million penalty the CFPB handed down to New Jersey-based mortgage lender PHH Corp. in what could turn out to be a landmark case, if the decision holds up.

“Despite the dip in enforcement actions this past quarter, it would be unwise for financial institutions to become complacent,” noted Pam Perdue, EVP and Chief Regulatory Officer at Continuity. “Historically, periods of lower enforcement activity around presidential election cycles are followed by increased scrutiny, and the actions taken against large entities always trickle down to smaller institutions.”

The BCI reported that despite the substantial drop in enforcement activity against financial institutions, the average institution will require an additional 1.63 full-time employee equivalents to handle regulatory changes that occurred during the third quarter. This calculated to an additional cost of $39,654 for the quarter, bringing the 12-month total to $150,676 for each financial institution just to deal with regulatory changes.

“Although significantly fewer enforcement actions were initiated in this past quarter, the number of items within each enforcement action jumped in Q3 by 250 percent above the four-year average,” said Donna Cameron, Continuity’s Director of Regulatory I/O. “These complex activities pose a heavy compliance burden on institutions, adding to the already high costs of keeping up with new regulations.”

The BCI is a quarterly tracking index published by Continuity’s Regulatory Operations Center. The Index measures the incremental cost burden on financial institutions to keep up with regulatory changes.

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.
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