Are you in charge of handling regulatory exam inquiries? Are you building a financial firm that is subject to regulatory compliance?
If the answer is yes, then read through this article to find out more about the following:
- What Are Some of the Main Regulators that Conduct Regulatory Exams in the US?
- Impact of Failure to Properly Address Regulatory Exam Inquiry
- 3 Most Common Concerns About How to Handle a Regulatory Exam Inquiry
Let’s take a look into each topic.
This analysis was written by compliance subject-matter experts with decades of experience, not hired copywriters or AI-based tools. We are regulatory exam experts.
Regulatory exams are a critical component of the financial services industry, serving as a critical safeguard against fraud and operational failures.
However, regulatory exam management can present significant challenges for financial institutions, including keeping pace with changing regulations, managing data and documentation, and allocating sufficient resources for exam preparation.
What Are Some of the Main Regulators that Conduct Regulatory Exams in the US?
In the US, compliance regulators such as FINRA, SEC, and CFPB conduct regulatory exams depending on the type of financial services. Some firms may be subject to multiple regulators and, thus, to multiple regulatory exams.
The exams are generally directed towards the firm as a whole, however, CCOs play a central role as regulators check whether the firm’s processes and practices comply with applicable laws, regulations, and industry standards.
Why Properly Addressing Regulatory Exam Inquiry Is Critical?
Unsatisfactory regulatory exams can result in heavy fines, damaged reputation, or even worse, license revocation. That’s why it is imperative that financial institutions proactively and thoroughly prepare for the exam by dedicating sufficient time and resources to ensure a successful outcome.
If you are in charge of regulatory compliance you might also have the three most common concerns we see in our clients and prospects about how to handle a regulatory exam inquiry:
How to Handle a Regulatory Exam Inquiry - 3 Most Common Client Questions
- What does a typical regulatory exam in the financial services industry look like?
- What are some of the main challenges we can face before, during, and after a regulatory exam?
- How can our compliance team overcome these challenges?
The questions and answers below are generally valid for all types of regulatory exams.
1. What does a typical regulatory exam in the financial services industry look like?
The specific format and scope of a regulatory exam varies by the regulator, type of exam, and institution being examined. However, here is a general outline of what a typical regulatory exam in the financial industry may look like:
Regulatory Exam Inquiry Step-by-Step Process
| 1. Pre-exam Planning | The regulator and the institution being examined work together to plan the exam scope and objectives. |
| 2. Exam Notification | The regulator formally notifies the institution of the upcoming exam and provides a list of requested documentation and information. |
| 3. Onsite / Remote Exam | The regulator conducts an onsite/remote examination of the institution's operations, systems, and controls. |
| 4. Exit Meeting | The regulator holds an exit meeting with the firm's management team to discuss their findings and provides initial feedback on any identified deficiencies or areas for improvement. |
| 5. Follow-up | The regulator may request additional information or documentation. |
| 6. Closing Report | The regulator issues a closing report summarizing exam findings and required corrective actions. |
2. What are some of the main challenges you can face before, during and after a regulatory exam?
Regulatory exam management is often a time-consuming and resource-intensive process that can pose significant challenges for financial firms.
Some of the main challenges we see in our practice are:
| Regulatory Exam Challenges | How Does It Affect Regulatory Exam Inquiry Outcome? |
| Managing compliance with the continually changing regulatory landscape | Financial firms often lack sufficient resources to monitor and comply with complex and ever- changing regulations. This ultimately leads to poor regulatory compliance and poor regulatory exam management at a later stage. |
| Managing documentation | This process is cumbersome and error-prone, especially when using manual data management systems. Also, the deadlines for providing the requested documentation are generally very tight. We see that firms typically underestimate the resources required for effective documentation management and timely submissions. In some instances, such inefficiencies result in negative regulator feedback or, even worse, actual deficiencies in the final report. |
| Juggling multiple exams simultaneously | Firms may be subjected to multiple exams simultaneously, making it challenging to ensure that each exam receives adequate attention. A common mistake in such a situation is to treat the exams jointly, assuming the same documentation can be submitted to different regulators. |
| Post-exam corrective measures | Another common mistake is to expect the actual exam to be the most difficult part of the regulatory exam management process and to underestimate the resources that must be allocated in the post-exam period. In such cases, firms are unprepared to timely and efficiently remediate identified issues. |
3. How can your compliance team overcome regulatory exam challenges?
Regulatory exam management can be quite burdensome, but financial firms can take a few essential steps to be better prepared. These are:
| Regulatory Exam Challenges | Compliance Team Solution |
| Prioritize proactive compliance and risk management measures | Invest in staff compliance training, conduct regular internal audits, and implement effective risk management frameworks. |
| Invest in technology solutions | This can include implementing centralized databases to store regulatory documentation, using software tools to automate compliance processes, and utilizing data analytics to identify compliance and risk issues. |
| Allocate sufficient resources | Firms should allocate sufficient resources to prepare for and respond to regulatory exams. |
| Maintain open and timely communication with regulators | Firms should maintain open and timely communication with regulators to ensure they know the latest regulatory requirements and expectations. |
| Conduct post-exam reviews | Firms should conduct post-exam reviews to identify areas for improvement and develop action plans to address any identified deficiencies or issues. |
How Can InnReg Help?
As a subject matter expert and specialized outsourced compliance provider, InnReg can support fintechs subject to regulatory exams with, an Outsourced Fintech Compliance Management, including among others:
- Review of your regulatory exam management processes;
- Support on documentation management and response to the regulator;
- Post-exam support.
About InnReg
InnReg is a team of over 30 Regulatory Compliance and Innovation Consulting experts helping fintechs succeed in highly regulated markets since 2013, globally. “InnReg - Compliance and Operations for Technology-Based BDs” is listed in the FINRA Compliance Vendor Directory.
If your business needs our support, do not hesitate to get in touch.
