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Financial Regulatory Rules and Enforcement May Increase in 2010

November 17, 2009

A growing sense of empowerment many financial services regulators gained under President Barack Obama’s administration in 2009 will likely transform into a broad array of new rules and agencies, as well as stepped-up enforcement actions in 2010, according to regulatory compliance experts at Wolters Kluwer Financial Services.  

The financial services industry is already beginning to see evidence of change as Congress debates additional legislation surrounding regulatory reform and regulators conduct more stringent exams. Adding to this regulatory burden, experts say, will be a soft U.S. economy that will likely lead many institutions to take more steps to better protect themselves and consumers from risk.

“There is a race in Washington, D.C. right now,” said Edward Kramer, executive vice president of regulatory programs at Wolters Kluwer. “It’s a race by legislators and regulators to see who can do more to protect the American consumer.”

Kramer noted the newly-proposed Consumer Financial Protection Agency (CFPA), as currently outlined by the House of Representatives Financial Services Committee, as a prime example. He says the CFPA would have more power over community and regional banks, as well as credit unions, than many of those institutions realize.

“While the CFPA may not turn out to be their primary regulator, it would still write, revise and have ultimate enforcement power over almost any regulation designed to protect the consumer,” said Kramer. “That means the CFPA has the power to tell a bank or credit union’s primary regulator to step aside so it can examine and issue an enforcement action against the institution for violating regulations if necessary, especially those focused on promoting fair and anti-predatory lending.”

And regulators are already getting tougher on fair lending violations according to Margaret Camp, director of compliance services at Wolters Kluwer, noting that regulators are looking more closely at automobile dealers, in addition to the lenders they work with.

“For the first time in recent years, it seems the Department of Justice is beginning to target dealer groups for fair lending violations,” said Camp. “Dealers, as well as lenders, need to make sure they are taking appropriate steps to prevent discriminatory lending in order to protect their consumers and their own business.”

David Thetford, securities compliance principal analyst at Wolters Kluwer, agrees that financial services regulators will increase their oversight efforts in 2010. For the securities industry, the driving forces are the financial crisis and much-publicized Ponzi schemes.

“The Madoff scheme has left regulators, particularly the Securities and Exchange Commission, wondering how such a massive scheme was missed and how they can prevent it from happening again,” said Thetford. “Proposals such as the new Investor Protection Act and Private Fund Investment Advisers Registration Act, are aimed at increasing protection for investors who entrust their money to financial professionals.”

Ted Dreyer, senior attorney at Wolters Kluwer, notes that securities and banking industry regulators have even teamed up with the Federal Trade Commission to better protect consumers. According to Dreyer, eight agencies across various financial services industries are working together to create one common privacy notice that institutions must share with all of their consumer customers.

“The new model privacy notice will likely be ready in 2010 and is intended to look a lot more like the nutritional labels you see on the side of cereal boxes, versus the text-oriented brochures that are given out now,” said Dreyer. “The idea is to create a cleaner, simpler explanation for the consumer of how an institution is protecting their personal information and how consumers can exercise their rights to opt-out of some sharing of their information.”

The weakened economy has also prompted more focus on consumer protection.

Kathy Donovan, senior compliance counsel for insurance compliance solutions at Wolters Kluwer, expects a continued interest by regulators on the use of credit scoring information by insurance companies. Additionally, economic concerns coupled with the focus on healthcare reform will likely mean more fines in the health insurance sector, she said.

“Health insurers are under rigorous scrutiny and state regulators are working hard to show that they are policing those under their jurisdiction and protecting the consumer,” said Donovan. “As a result of state action, we’re seeing insurers make changes that benefit the consumer, such as trying to minimize the swelling ranks of the uninsured by changing eligibility requirements in health insurance policies.”

Kevin Byrne, senior regulatory consultant at Wolters Kluwer, says the struggling U.S. economy has also elevated fraud concerns, since tough economic times can cause more employees at financial institutions to resort to fraud on top of the financial crimes already being committed against an institution by outsiders.

“The stakes are high for institutions since an employee with inside knowledge of the firm’s workings can drain tens, if not hundreds, of thousands of dollars from legitimate customer accounts in a very short time,” said Byrne. “Many institutions are starting to realize that by investing in the people and technology up front to stop internal and external fraud losses before they occur, they can actually improve their bottom line in the long run.”

Byrne said that as part of these efforts, some institutions are beginning to connect their anti-fraud and anti-money laundering investigation units. In doing so, he says both have access to more up-to-date customer information that they need to do their jobs more effectively.

“As U.S. Navy Admiral Hyman Rickover, known as the father of Nuclear Navy, said, ‘You don’t get what you expect; you get what you inspect,’” said Thetford. “I think that’s a motto many regulators and legislators are moving toward. They are paying closer attention, finding gaps in the regulatory system, and taking steps to fill them.”

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