Compliance in the Caddyshack
In today’s financial services world, keeping up with the rules of the game is an increasingly challenging task. The seemingly endless string of regulatory changes and promulgation of new requirements around long-standing products and services demands greater attention to detail than ever before. It’s enough to make you four-putt a flat-greened 145-yard par 3. Suffice it to say a banker’s old adage of 3-6-3 (take in money at 3 percent, loan it out at 6 percent and be on the golf course by 3:00 p.m.) went away with Milburn Drysdale and the cancellation of “The Beverly Hillbillies” TV show back in 1971.
In compliance much like golf, there are an established set of rules governing both games: The Rules of Golf in golf and Policies and Procedures within the compliance area. Everyone who plays golf must abide by those rules on the golf course, and every financial institution must have clearly articulated governance documents that set forth the performance expectations for its staff. Failure to follow the rules in either of these areas carries consequences. In golf, there is most often a one or two stroke penalty and perhaps the loss of a hole in match play. In compliance, the consequences can be just as severe – reimbursements to customers, consent orders, fines up to $1,425,000 per day and public humiliation.
Both golf and compliance necessitate rigorous preparation in order to excel. In golf, there are countless hours spent on the driving range and putting green, often in ideal weather conditions. There are reliable theories that correlate the amount of time spent practicing to the golfer’s skill level. In compliance, there are countless hours spent in cold, poorly-lit conference rooms, often under ideal outdoor weather conditions. There are also reliable theories that correlate the amount of time spent training in cold, poorly-lit conference rooms to the compliance professional’s skill level.
Sound advice can benefit everyone. Even 2015 Masters and U.S. Open winner Jordan Spieth has a coach and a caddy, sounding boards that help him analyze difficult situations and make better-informed decisions about his golf game. For the compliance professional, consultants can help provide an independent assessment of your institution’s compliance performance, offering sound guidance in helping you navigate difficult compliance issues. And while a golf coach or caddy can’t swing the club for the golfer, compliance consultants can assist your institution with transaction testing and policy and procedure development, directly lessening the regulatory burden you’re experiencing.
Your performance in golf is measured by the widely-accepted scorecard method, which aggregates the shots you have taken on each hole during the round. In medal play, the fewer strokes the better. In compliance, the regulatory examination report is a widely accepted scorecard, aggregating the violations and exceptions identified during the examination. The fewer strokes the better.
Club selection allows the golfer to exert certain influence over the golf shot. The higher the number of the club (for example, a 3 iron versus a 9 iron), the greater loft the shot is expected to have, and the greater control the golfer has in placing the shot where s/he wants, preferably close to or in the hole. In compliance, your institution can to some degree select which consumer regulations will apply based on the products and services it chooses to offer. If you don’t offer consumer leases, you won’t have to worry about complying with Regulation M. If you make home improvement loans, you bring Regulation Z, RESPA, HMDA, Regulation B and the Fair Housing Act into play, and we are probably leaving off a few others.
Golf is one of the few games where the player is actually his or her own referee (although there are rules officials on the course at the professional level). This requires each player to have a basic knowledge of situations where a particular rule is in play and where a penalty might need to be called against oneself. In compliance, self-reporting of problems is highly advisable. Identifying and resolving issues outside of the formal examination process can actually increase an examiner’s confidence in your institution and its controls and processes. Knowing that your internal checks and balances work should be a big confidence booster to everyone concerned that your institution is indeed attempting to play by the rules.
No discussion of golf or compliance would be complete without mentioning the ‘R’ word. In golf, risk presents itself in the form of water hazards and sand traps, those obstacles on the course that regularly magnetize golf balls into them. The golfer is often tempted by the course designer to accept more risk in return for greater reward. There is abundant risk in the compliance world – incorrect or erroneously-timed disclosures; failure to identify and report suspicious activity; fees being charged above regulation-specific tolerance levels – and if not properly managed, most of these risks can lead to enforcement action, fines and damage to the institution’s public reputation.
We hope that we have not ruined your next round of golf by causing you to start thinking about regulatory compliance the next time you pull up to the first tee. Instead, we hope you think about your next round of golf when you’re in the throes of your next regulatory examination.
*Article originally published in the Carolina Banker.