<img src="https://ws.zoominfo.com/pixel/pIUYSip8PKsGpxhxzC1V" width="1" height="1" style="display: none;">

What is Regulatory Compliance for Banks?

7 min read
Apr 10, 2024

Regulatory compliance is essential for banks and other financial institutions, ensuring that operations and activities meet legal and regulatory requirements and adhere to industry-recognized ethical standards. 

Abiding by compliance laws protects both your bank and customers. For instance, the Gramm-Leach-Bliley Act (GLBA) mandates that financial institutions safeguard nonpublic customer information. 

Complying with this law keeps customer information safe from identity theft and helps banks avoid hefty penalties and fines. It also maintains a financial institution’s reputation and builds trust with customers. 

In creating a compliance-first banking culture, institutions promote transparency and accountability, reinforcing the integrity of the entire system.

What is regulatory compliance?

Regulatory compliance varies by industry and an institution’s size and geographic footprint. Institutions that conduct business across state lines or internationally must comply with regulations specific to the regions where they operate. 

Does your business have a presence or customers in California? If so, you need special policies and a plan for complying with the California Consumer Privacy Act (CCPA). 

Certain industries, such as financial services and banking, healthcare, and information technology (IT), face greater regulatory burdens than others. Banks, for example, must meet numerous compliance requirements from governmental agencies such as the Department of Justice (DOJ), the Consumer Financial Protection Bureau (CFPB), and the Federal Trade Commission (FTC), in addition to the regulatory authorities that oversee them. 

Banks and other organizations become subject to even more regulations as they grow. Financial institutions need regulatory change management processes to adapt to new rules and laws.\

What are the consequences of regulatory non-compliance?

Regulatory non-compliance can have severe consequences. Bank regulatory compliance protects your institution from the following risks and damages: 

Regulatory penalties and enforcement actions: Depending on your institution's size, regulators may impose substantial fines and penalties. They may also limit your ability to generate revenue by restricting the number of profitable activities your institution can engage in. 

Operational disruptions: Operational disruptions occur due to the failure of processes and systems, along with the people managing them. Complying with regulatory laws and guidance on fraud, vendor relationships, and business continuity planning helps prevent costly operational disruptions. 

Reputational damage: Trust is easy to lose and difficult to regain. Non-compliance can tarnish a bank’s reputation, leading to a decline in its customer base and difficulties attracting new partnerships and investors. 

Increased regulatory scrutiny: Regulators who discover compliance issues at financial institutions will examine them more closely in the future. Banks with compliance violations should prepare to spend more on compliance management, including external audits, hiring additional staff, and regularly conducting internal compliance reviews.


Severe Enforcement Actions Against US Banks Since 2020

The benefits of regulatory compliance

Financial institutions with mature compliance management programs enjoy numerous benefits beyond reducing costs from operational disruptions, avoiding regulatory penalties, and maintaining their reputation. These benefits include: 

Creating a competitive advantage: Financial institutions that comply with laws and regulations distinguish themselves in an increasingly competitive industry. Demonstrating a commitment to compliance shows consumers and the public that your institution is doing the right thing and drives profits. 

For example, banks receive a score under the Community Reinvestment Act (CRA) that is publicly available. These scores are on a 4-point scale: Outstanding, Satisfactory, Needs Improvement, or Substantial Noncompliance. Scores assess a bank’s lending volume in underserved communities in their geographic reach (among other factors).

Banks with Outstanding CRA ratings have a higher market share of mortgage lending and profit compared to banks with Satisfactory ratings. While receiving a score of “Needs Improvement” or “Substantial Noncompliance” means banks must take action to increase their community lending activity, banks that go above and beyond to receive a rating of “Outstanding” enjoy increased revenue, according to studies. 

Financial stability: Regulatory compliance ensures financial institutions maintain adequate capitalization, engage in sound lending practices, and address potential liquidity shortfalls. 

FIs must develop contingency funding plans (CFP) that help them weather various market conditions and build long-term resiliency. 

Better relationships with regulators: While noncompliance leads to increased scrutiny, a strong compliance record leads to regulators taking a more favorable view of your institution. Examiners are likely to be more lenient with banks with compliance findings if they see they are making a real effort to adhere to regulations. 

Promotes ethical behavior: When financial institutions build a culture of compliance, it encourages ethical behavior across the organization. Employees are more aware of how their actions impact compliance.

Developing compliance policies

Regulatory compliance policies outline your institution’s governing principles. Typically, compliance policies reflect your board of directors’ view on how you should operate. 

Without policies, your institution's business units won’t be able to implement the right procedures and processes to comply with the law. These policies establish a framework that guides strategic decision-making, setting the tone for how your institution can meet business goals while satisfying regulatory requirements. 

Your policy plays a critical role in fostering a culture of compliance, protecting your institution from actions that break the law or ethical codes of conduct. For example, your loan officers may be tempted to pay real estate agents for mortgage referrals to increase business, but that is forbidden by regulations. 

Compliance officers are responsible for pointing out these violations to the board and senior management so they can devise a solution that prevents staff from paying for referrals. That includes training to ensure loan officers are aware of regulations. 

As regulatory requirements grow, your compliance policy offers a framework for prioritizing activities that align with business objectives and regulatory demands. 

Incorporating technology in the management of policy documents dramatically enhances efficiency in creating, sharing, maintaining, and updating policies. Utilizing a centralized portal allows for the easy storage and retrieval of the most up-to-date documents, streamlining compliance efforts.

What is the role of a compliance officer?

Your compliance officers are pivotal in handling compliance-related issues so your institution can better manage risks, maintain its reputation among customers and the community, and avoid legal penalties and regulatory consequences. 

Regarding bank regulations, compliance officers help: 

Save you money: Officers work to ensure that your institution won’t pay penalties or spend money on costly litigation. 

Guard your bank’s reputation: Avoiding bad publicity and press is critical. You don’t want the reputation to be the bank that doesn’t follow consumer protection laws. 

Track regulatory changes and new laws: Regulations are constantly changing and evolving. Your compliance officer reads through dense regulations, updating policies and procedures. 

Help your bank meet its strategic goals: Compliance officers do not receive enough credit. Many unfairly view them as a necessary evil. But an effective compliance officer will help your institution think creatively about how innovation and compliance fit together. 

Related: The Top 10 Reasons Why Compliance Officers Deserve to Be Celebrated

A compliance officer is tasked with: 

  • Conducting regular internal compliance reviews and audits to proactively manage risk in collaboration with the board, senior management, and other employees 
  • Keeping an eye on the regulatory landscape to ensure ongoing compliance 
  • Serving as a central authority in addressing all compliance-related issues and concerns 
  • Implementing disciplinary measures in instances of non-compliance with regulatory programs and practices 
  • Revising procedures and making policy recommendations that align with best practices to promote adherence to regulations and laws 

Common compliance regulations in banking

Banks have significantly more compliance requirements compared to other industries. Let’s examine some of the more common regulations and requirements for financial institutions. 

Consumer Protection Laws 

Banks must comply with many laws related to consumer protection, such as loan and credit disclosures and the equal treatment of existing and future customers. These include: 

  • Home Mortgage Disclosure Act (HMDA) 
  • Truth in Lending Act (TILA) 
  • Electronic Fund Transfer Act (EFTA) 
  • Equal Opportunity Credit Act (ECOA) 
  • Fair Credit Reporting Act (FCRA) 
  • Real Estate Settlement Procedures Act (RESPA) 
  • Flood Disaster Protection Act 
  • Truth in Savings Act (TISA) 
  • Unfair, Deceptive, and Abusive Acts and Practices (UDAAP) 

Operational Compliance 

Operational compliance in banking refers to adherence to laws, regulations, and practices that govern financial institutions' daily functioning and management. These include: 

  • Business continuity planning (BCP) and business impact analysis (BIA) 
  • Branch operations 
  • Bank Secrecy Act (BSA) 
  • Disaster recovery 
  • ESG (Environment, Social, and Governance) 
  • Findings management 
  • Fraud
  • Physical Security 
Cyber Compliance 

Cyber compliance requires financial institutions to follow regulatory standards and best practices to protect against cyberattacks and secure sensitive consumer data. As the sophistication of cybercriminals increases, banks and regulators have developed stringent cybersecurity laws and identified key risk areas. These include: 

  • Gramm-Leach-Bliley (GLBA) 
  • General Data Protection Regulation (GDPR) 
  • Payment Card Industry Data Security Standard (PCI-DSS) 
  • Online and mobile banking 
  • Peer-to-peer (P2P) lending 
  • Remote Deposit Capture (RDC) 

What are the steps banks can take to ensure regulatory compliance?

Compliance risk management involves identifying and mitigating the risks associated with meeting regulatory requirements. It’s more than ticking items off a checklist; it requires a continuous assessment of regulations and the institution’s ability to maintain compliance.   

Financial institutions should take the following steps in managing regulatory compliance: 

1. Implement a robust compliance framework: Establish a comprehensive compliance program with policies, procedures, and controls to address regulatory requirements. Designate a compliance officer or team responsible for oversight.

2. Conduct regular risk assessments: Identify and evaluate compliance risks associated with banking operations, including new products, services, and changes in the regulatory landscape. Prioritize risks based on their impact and likelihood of occurring. 

3. Implement Effective Compliance Controls: Develop controls tailored to mitigate the compliance risks identified in your risk assessments. Lean on technology to automate as many controls as possible 

4. Train employees: Update materials and provide ongoing training to ensure all bank employees understand their role in maintaining compliance. 

5. Conduct audits and internal compliance reviews: Establish ongoing monitoring practices to ensure compliance measures are effective and being followed. Banks should conduct both independent audits and regular compliance reviews.

6. Manage compliance findings: Track problem areas or issues that appear during audits or compliance reviews. Banks should work to mitigate these issues and show examiners their progress in remediating noncompliance with regulations. 

Related: What is Compliance Risk Management?

Regulatory compliance is part of your overall risk management strategy

Managing compliance risk is a critical component of integrated risk management (IRM), a comprehensive framework financial institutions use to manage risks. This is achieved with a strong compliance management system (CMS). A CMS gives banks a structured framework they can deploy to ensure adherence to applicable laws and regulations.

A CMS assists financial institutions in identifying and mitigating compliance risks, monitoring compliance-related activities, and providing evidence to regulators that your bank has an effective compliance program. This system is essential for meeting regulatory demands and maintaining the integrity and reputation of your institution.

Need help with compliance testing and monitoring? Download our free whitepaper: “Compliance Review Roadmap for Financial Institutions”

New call-to-action

Subscribe to the Nsight Blog