Aug 7, 2016
My guests today are two of the most thoughtful people in
the United States on the topic of regulatory compliance. They are
the chief compliance officers of
Citigroup and
Wells Fargo – Kathryn Reimann and Yvette
Hollingsworth Clark.
Our listeners include a lot of people who are not fascinated
by the topic of regulatory compliance, to put it mildly. The fact
is, though, that compliance has shifted, rather suddenly, from
being boring to most people, to being fascinating. And whether it
fascinates you or not, it has become absolutely critical to whether
financial companies can thrive. Becoming great at compliance – both
effective and efficient -- has become mission-critical competencies
for every financial company, large and small.
Let’s step back and think about what’s happening.
Technology is disrupting finance, which means that it’s also
disrupting financial regulation, which therefore means that it’s
also disrupting compliance, inevitably. It will completely change
how financial companies implement the massive set of regulatory
requirements that pervade every aspect of what they do.
This is going to be – already is – a wrenching process. For
better or worse, consumer financial protection regulation has
always been hypertechnical. built mainly around highly prescriptive
rules. Congress passes laws, the regulatory agencies issue
regulations to implement them, and the industry implements the
regulations. I’ve spent much of my career in this field and have
watched it mature into a major function – major cost center – in
every bank, into a profession of experts, and into an industry of
technology vendors and consultants and lawyers who help financial
companies follow these rules. With a few exceptions, the system is
about getting the details right.
That’s still true, of course. We still have voluminous,
detailed rules aimed at consumer protection. But the financial
crisis shifted the ground under this whole system, by supplementing
the traditional “rules-based” system with a new “principles-based”
overlay that aggressively requires that financial products be not
only “compliant,” but also “fair” – able to meet heightened
prohibitions on practices that are unfair, deception or abusive
(which we in the compliance world, with our habit of using
acornyms, call, “UDAAP.”
And then, as if that weren’t a big enough change, the
financial world has now also been hit with a second huge wave of
change, in technology innovation. And it’s even more challenging
than the shift from rules to principles, because it’s coming
faster, and it’s even more unknowable than regulatory
change.
All this means we’ve entered into a state of permanent
uncertainty. The products and market and technology are changing
too fast for the legislative and regulatory process to keep pace.
The regulatory process can’t, and won’t, provide clarity on exactly
what the industry has to do. Instead, it will review what has been
done and will, after the fact, penalize actions that are judged to
have been illegal because they’re subjectively determined to have
been unfair, deceptive, abusive, or discriminatory in
effect.
The result is that financial companies are going to have to
build a whole new kind of compliance model. They won’t have the
luxury of waiting for clear-cut rules. They’ll have to figure out
for themselves how regulators may react to rapid change, and make
their own decisions, in the absence of clear guidance, about what
is risky.
This requires a full overhaul of the traditional compliance
model. For one thing, it means deeply, actively engaging the CEO,
the board, and the business-side leadership of every company in
proactively managing regulatory risk. They can’t delegate it and
assume that their experts and technology will take care of it. They
have to make their own decisions, and they have to do it not
reactively, but proactively. Again, they’ll have to think for
themselves.
And they’ll also have to adopt a new generation of regtech
solutions, which are starting to emerge to improve outcomes and cut
costs.
There’s a lot to say about what’s ahead on all this, but for
today, we’re going to pick the brains of two of the most impressive
leaders anywhere in the compliance world. Yvette
Hollingsworth Clark is the chief compliance officer of Wells Fargo,
and Kathryn Reimann leads this work for Citigroup. I’ve known them
both for years, and I was lucky enough to catch them together while
we were all at the same event, and carve out some time to
talk.
Listen to their views on how compliance is changing, the
impact of technology, and the need to bring a “fairness” lens to
absolutely every regulatory question. They talk about how to do
that, including how to integrate teams that can bake it into daily
decision-making. They talk about the challenges arising because of
the accelerating the speed of change. And they discuss the
challenges of working with old legacy IT systems that were created
long before today’s regulations and technology. They talk about the
need for a level regulatory playing field for banks and nonbanks,
how to work with regulators, and advice for regulators. They also
talk about their own journeys – Kathryn notes that when she started
working as a lawyer, the compliance profession didn’t even
exist.
We’ve come a long way.
These are people who are pioneering new ways of tackling
compliance. They’re doing it in some of the world’s biggest, most
complex, and most highly-regulated companies, but their insights
apply to every financial company – large and small, and old or
brand new.
Also….
Vote for my panel on the SXSW
PanelPicker!
I need your help getting my panel selected for inclusion in
South By Southwest – SXSW – the huge technology conference that
runs in Austin TX each year in conjunction with the famous music
and film festival. I attended SXSW (“South by,” as people call it)
for the first time last year, and it was absolutely fascinating.
It’s unique among the conferences I attend, in that it’s broader
than finance. It’s about technology overall. I believe fintech is
more tech than fin, in the sense that it’s being driven by enormous
and converging technology trends. We in the financial realm tend to
underestimate how big these are and how fast they’re moving,
because we think of them in terms of the financial products they’re
reshaping – but they’re much bigger than those. SX is a great place
to go to learn and think about these wider trends, while also
seeing the most interesting new things emerging in fintech, as
well.
So I have proposed a panel discussion there on RegTech – the
shift toward using new generation technology to get to win/wins on
regulation, by reducing regulatory costs and burdens while
improving outcomes for customers at the same time. I’m calling the
panel REGULATION INNOVATION and my amazing guests will be Josh
Reich, the CEO of Simple; Jennifer Tescher, CEO of CFSI; and
Adrienne Harris of the White House.
Last year, SX received 4,600 proposals, so, I need you to
vote for the session on the SX Panel Picker. Voting opens up
on Monday, August 8 and
closes September 2. Please Google the
SXSW PanelPicker during that time period, and vote for session
called Regulation Innovation. And then plan to come to SX, which is
3/6-10 in Austin. I’ve been thinking maybe we should take a group
of financial folks. What do you think?
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We’ll see you soon with some incredibly interesting new
guests – startups, banks, and even someone from Harvard. Til next
time!
As Kathryn rightly states, such an overhaul of the system
requires updating perspectives of themselves and of their hires. It
also requires a great degree of inter-departmental collaboration
and communication. This is something that I have seen to be true
all across the map of regulation - open dialogue is essential. In a
previous podcast,
Thomas Curry,
the Comptroller of Currency and head of the taskforce on
responsible innovation agrees.
Kathryn and Yvette explain that compliance officers have a
very tough job ahead, and I couldn't agree more. They have to
balance a fine line between assessing and preventing massive risk
from such huge amounts of data sharing while not becoming an
obstacle to innovation. As Yvette states, we want to use innovation
to regulate innovation.
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