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On December 17, the Federal Reserve Board (Fed) released a new issue of the Consumer Compliance Supervision Bulletin focusing on supervisory insights into consumer compliance issues related to fintech to assist financial institutions with assessing and managing risk associated with technological innovation. Among the topics covered in the bulletin, are (i) managing risk with fintech collaborations—the Fed stresses the importance of creating strong policies and procedures, as well as board and senior management oversight, comprehensive and tailored training, and risk monitoring; (ii) managing UDAP risks with online and mobile banking platforms—the Fed recommends a focus on ensuring consistency and accuracy in disclosures on the platforms and the regular monitoring of complaints; and (iii) managing possible fair lending risks resulting from targeted online marketing—the Fed suggests careful monitoring over marketing activities and vendors, as well as close review of filters used with internet advertising to prevent excluding populations with legally protected characteristics. The bulletin will be featured on the agency’s new fintech page previously covered by InfoBytes here.
On December 17, the Federal Reserve Board (Fed) announced a new fintech website section created to engage with banks and other companies involved in fintech innovation. According to the announcement, the new section will highlight supervisory observations regarding fintech, provide a hub of information for interested stakeholders on innovation-related matters, and deliver practical tips for banks and other companies interested in engaging in fintech activity.
Additionally, on February 26, 2020 the Fed will hold the first in a series of “fintech innovation office hours” in conjunction with the Federal Reserve Bank of Atlanta. According to the Fed, they intend to host “office hours” nationwide to provide opportunities, especially “helpful to community banks and their potential fintech partners,” and to speak to well-versed Fed staff members about concepts and advancements surrounding “emerging financial technologies.” The announcement provides a link for interested parties to sign up to participate.
On December 12, the Federal Reserve Board (Fed) issued SR 19-15, “Revised Examination Guidelines for Representative Offices of Foreign Banks,” which is applicable to foreign banking organizations (FBOs) with U.S. representative offices (offices) subject to supervision by the Fed. According to the letter, Reserve Banks should examine offices of FBOs at least every 24 months, and ideally, at the same time as any examination of related U.S. branches or agencies. An office can be examined more often (i) based on state law examination requirements; (ii) if “supervisory concerns” exist regarding the foreign bank’s condition; and (iii) if the activities of the office are central to the FBO’s entire U.S. operations or if the office has a large number of employees. The letter provides guidelines for documentation of exam findings and for assignment of various ratings including compliance, risk management and operational controls. The Fed notes that “the type of documentation and rating should vary depending on the representative office’s activities and the significance of supervisory concerns.”
On September 30, the OCC issued updates to four booklets of the Comptroller’s Handbook: Bank Supervision Process, Community Bank Supervision, Federal Branches and Agencies Supervision, and Large Bank Supervision. Among other things, the updates include (i) the interim final rule for the expanded 18-month supervisory cycle for certain institutions (covered by InfoBytes here); (ii) a revised OCC report of examination policy based on the revised Federal Financial Institutions Examination Council report of examination policy; (iii) the revisions to the OCC’s enforcement action policies (covered by InfoBytes here); and (iv) changes to the OCC’s credit underwriting assessment.
On July 31, the OCC announced two new units, which consolidates bank supervision support, risk analysis, and oversight of national trust banks and significant service providers. One hundred and fifty staff members were realigned to create the news units, the OCC reported, with the intention of eliminating redundancies and “presenting a single voice to supervised institutions.” The OCC additionally noted that the agency’s Committee on Bank Supervision “will provide strategic direction and oversight to both units, and will review and approve strategic plans and initiatives, annual business plans or operating plans, and major projects and initiatives.”
The first unit, Supervision System and Analytical Support, consists of OCC supervisory and policy unit teams that oversee supervisory information systems, data management, business intelligence, risk analysis, and supervision risk management. The second unit, Systemic Risk Identification Support and Specialty Supervision, includes lead experts from Large Bank Supervision and Midsize Bank Supervision, in addition to teams responsible for supervising trust companies from the Northeastern District National Trust Banks team and significant service providers from Bank Supervision Policy.
The OCC further noted that Midsize and Community Bank Supervision and Large Bank Supervision will retain primary responsibility for overseeing the banks, savings associations, and federal branches and agencies of foreign banks that compose the federal banking system.
On June 13, the FDIC released a new publication, Consumer Compliance Supervisory Highlights, intended to provide information and observations related to the FDIC’s consumer compliance supervision activities in 2018. Specifically, the report covers approximately 1,200 consumer compliance examinations conducted by the FDIC in 2018. Overall, the FDIC noted that, “supervised institutions demonstrated strong and effective management of consumer compliance responsibilities.” The report identifies some of the most salient compliance issues identified by the FDIC during 2018, including (i) overdraft programs, which were found to be potentially unfair or deceptive when an institution used an “available balance method,” sometimes resulting in more overdraft fees than were appropriate because the institution assessed a fee when the transaction did not overdraw the account; (ii) RESPA anti-kickback violations, which concerned payments “disguised as above-market payments for lead generation, marketing services, and office space or desk rentals” or as marketing and advertising agreements; and (iii) Regulation E, where certain institutions were found to have incorrectly calculated consumer liability for unauthorized transfers, failed to resolve errors properly, or discouraged consumers from filing error resolution requests. The report also covers issues with skip-a-payment loan programs and the calculation of finance charges and disclosures related to lines of credit.
On February 14, the FDIC released its 2018 Annual Report, which includes, among other things, the audited financial statements of the Deposit Insurance Fund and the Federal Savings and Loan Insurance Corporation (FSLIC) Resolution Fund. The report also provides an overview of key FDIC initiatives, performance results, and other aspects of FDIC operations, supervision developments, and regulatory enforcement. Highlights of the report include: (i) the FDIC’s efforts to adopt and issue proposed rules on key regulations under the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA); (ii) efforts to strengthen cybersecurity oversight and help financial institutions mitigate cyber risk; (iii) supervision focus on Bank Secrecy Act/Anti-Money Laundering compliance; and (iv) financial institution letters providing regulatory relief to institutions affected by natural disasters. The report also highlights the FDIC’s monitoring of financial technology developments through its various research groups and committees to better understand how technological efforts may affect the financial market. Lastly, the report covers the agency’s efforts to encourage de novo bank applications, including the December 2018 request for information soliciting comments on the deposit insurance applications process (covered by InfoBytes here).
On November 29, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform” to discuss efforts to improve the Bank Secrecy Act/anti-money laundering (BSA/AML) regulatory, supervisory, and enforcement regime. Committee Chairman Mike Crapo, R-Idaho, opened the hearing by emphasizing the need for a continued dialogue on modernizing the BSA/AML regime to “encourage the innovation necessary to combat illicit financing while also encouraging regulators to focus on more tangible threats, and law enforcement to increase interagency cooperation and improve information sharing throughout the process.”
Among other things, Financial Crimes Enforcement Network (FinCEN) Director Kenneth A. Blanco highlighted the following three key priorities as part of FinCEN’s “multi-prong approach” to the regulatory reform process: (i) examining and understanding the value and effectiveness of the BSA through data-driven analysis in conjunction with both considering changes to enhance efficiency (such as evaluating suspicious activity and currency transaction reporting requirements) and engaging with regulators through, for example, monthly meetings with the FFIEC’s Anti-Money Laundering Working Group; (ii) “promot[ing] responsible innovation and creative solutions to combat money laundering and terrorist financing” by exploring ways to collaborate with financial institutions to improve AML/countering the financing of terrorism compliance, fostering innovation, and leveraging technology while also minimizing vulnerabilities; and (iii) “[e]nhancing public-private partnerships that reveal and mitigate vulnerabilities” and sharing information with the private sector to help identify suspicious activity.
OCC Compliance and Community Affairs Senior Deputy Comptroller Grovetta N. Gardineer discussed the agency’s efforts to enhance the efficiency of its current supervisory practices, and commented on how new technologies such as artificial intelligence and machine learning provide opportunities for banks to cut costs and identify suspicious activity. Gardineer also highlighted the OCC’s Money Laundering Risk System, which allows for the identification of potentially higher-risk community bank areas by “identifying the products and services offered by these institutions, as well as the customers and geographies they serve.” In addition, Gardineer offered recommendations for BSA amendments to improve supervisory efforts, such as (i) requiring a periodic review of BSA/AML regulations to identify those that may be outdated or burdensome; (ii) amending BSA safe harbor rules to clarify that a financial institution can file a suspicious activity report without being exposed to civil liability; and (iii) expanding safe harbor to permit information sharing beyond money laundering and terrorism financing between financial institutions without incurring liability. Moreover, Gardineer stated that FinCEN’s notice requirement with respect to information-sharing under section 314(b) of the USA Patriot Act should be eliminated or modified in order to enhance institutions’ ability to share information.
FBI Criminal Investigative Division Section Chief Steven M. D'Antuono also discussed, among other things, the Treasury Department’s recent Customer Due Diligence Final Rule (see previous InfoBytes coverage here), and stated that the Rule is “a step toward a system that makes it difficult for sophisticated criminals to circumvent the law through use of opaque corporate structures.”
On November 9, the Federal Reserve Board (Board) released the inaugural issue of a new publication, Supervision and Regulation Report (Report), which summarizes banking system conditions, Board supervisory and regulatory activities, trends dating back to the financial crisis, and differing approaches for large financial institutions and regional/community banking organizations. The Report discusses the safety and soundness of the banking industry, and states that the “strong economy” has had a positive effect on the return on equity and return on average assets for banks, with figures showing that industry profitability ratios in the second quarter of 2018 are at a 10-year high.
However, the Board also discusses several areas of concern including, among other things, that firms assigned “less-than-satisfactory-ratings generally exhibit weaknesses in one or more areas such as compliance, internal controls, model risk management, operational risk management, and/or data and information technology  infrastructure.” The Board also cites weaknesses in Bank Secrecy Act/anti-money laundering (BSA/AML) programs. The Report outlines future supervisory priorities, which continue to address risk management controls and cyber-related risks, and also include (i) a focus on four specific components: capital; liquidity; governance and controls; and recovery and resolution planning for the largest firms; and (ii) a focus on credit risk, operational risk, sales practices and incentive compensation, and BSA/AML compliance for regional and community banks. In addition, the report discusses plans to minimize regulatory burdens, tailor bank examinations to risk, and optimize supervision resources.
On October 31, the Federal Reserve announced a proposed rulemaking to more closely match certain regulations for large banking organizations with their risk profile. The proposal would establish four risk-based categories for applying the regulatory capital rule, the liquidity coverage ratio rule, and the proposed net stable funding ratio rule for banks with $100 billion or more in assets. Specifically, the Federal Reserve proposes to establish the four categories using risk-based indicators, such as size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposure. According to the proposal, the most significant changes will be for banks are in the two lowest risk categories:
- Banks with $100 billion to $250 billion in total consolidated assets would generally fall into the lowest risk category and would (i) no longer be subject to the standardized liquidity requirements; (ii) no longer be required to conduct company-run stress tests, and (iii) be subject to supervised stress tests on a two-year cycle.
- Banks with $250 billion or more in total consolidated assets, or material levels of other risk factors, that are not global systemically important banking institutions (GSIBs), would (i) have reduced liquidity requirements; and (ii) only be required to perform company run stress tests on a two-year cycle. These banks would still be subject to annual supervised stress tests.
Banks in the highest two risk categories, including GSIBs, would not see any changes to capital or liquidity requirements. A chart of the proposed requirements for each risk category is available here.
Comments on the proposal must be received by January 22, 2019.
Additionally, the Federal Reserve released a joint proposal with the OCC and FDIC that would tailor requirements under the regulatory capital rule, the Liquidity Coverage Ratio and the proposed Net Stable Funding Ratio to be consistent with the prudential standard changes.