Fintech Compliance

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How to Handle a Regulatory Exam Inquiry

Sep 27, 2023




4 min read

Are you in charge of handling regulatory exam inquiries? Are you building a fintech 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. 

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. 

InnReg's subject-matter experts created this analysis, not freelancers, copywriters, or ChatGPT. We are global regulatory compliance experts since 2013.

How to Handle an Exam Inquiry
How to Handle an Exam Inquiry

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 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:

  1. What does a typical regulatory inquiry in the financial services industry look like?

  2. What are some of the main challenges we can face before, during, and after an inquiry?

  3. How can our compliance team overcome these challenges?

The questions and answers below are generally valid for all types of 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.

How to handle a regulatory exam

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: 

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 inquiry 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: 

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 inquiries.

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?

InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013.

We are especially effective at launching and scaling fintechs with innovative compliance strategies and delivering cost-effective managed services, assisted by proprietary regtech solutions.

If you need help with compliance, reach out to our regulatory experts today:

Published on May 18, 2023


Last updated on Sep 27, 2023

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