Regulatory Intensity
Given continued discord and uncertainties, regulatory intensity focus on risk management/governance, financial risk, and data
Impact
In 2024, the intensity of supervision and regulation will continue with marked changes to reviews and examinations (e.g., more frequent, faster response, issues escalation, more rapid remediation) and a focus on risk management and governance (e.g., liquidity, capital, interest rate, concentrations, operations). This intensity will require financial services providers to (re)assess the current and target states of their operations; risk management policies, governance, and controls; and data and systems infrastructure.
Firms should anticipate:聽
- Immediate Action:聽Growing scrutiny of 鈥渨eaknesses鈥� in risk management and compliance, especially with regard to correcting deficiencies, will drive regulators to more stringent evaluations, possible ratings downgrades, and/or supervisory and enforcement actions. Firms will need to show both immediate assessment and resources to address potential weaknesses, as well as sustained聽processes (and executive accountability) to mitigate and manage risks.
- Commitment to Resolve: Regulators will view inability to timely remediate supervisory concerns or identified 鈥渨eaknesses,鈥� or continuing, recurring, or increasing deficiencies, as cause to impose increasingly comprehensive and severe actions up to and including limitations on growth and required divestitures. Firms will need to demonstrate a commitment to resolving 鈥渨eaknesses鈥� such as through self-identification, proactive disclosure, completed root cause remediation, voluntary restitution, and executive accountability.
- Intangible Risks: Regulators will expect risk management and governance processes to be adequately resourced (e.g., skilled staff, technology investment); risk management and compliance deficiencies (and particularly during times of 鈥渃ost take-out鈥�) may be seen as indicators of insufficient investment and/or resourcing, increasing both operational and intangible risks. Regulators will identify firms as 鈥減ersistently weak鈥� or 鈥渞epeat offenders鈥� in public enforcement actions, which will subject those firms to heightened reputation risk and may also have implications to the examinations of other regulators. Similarly, requirements or restrictions imposed on firms (e.g., reduction in asset size, additions to capital or liquidity, divestiture of subsidiaries or business lines) may heighten risks related to legal and compliance as well as market share and competition.
Firms should anticipate:聽
1
Immediate Action:
Growing scrutiny of 鈥渨eaknesses鈥� in risk management and compliance, especially with regard to correcting deficiencies, will drive regulators to more stringent evaluations, possible ratings downgrades, and/or supervisory and enforcement actions. Firms will need to show both immediate assessment and resources to address potential weaknesses, as well as sustained processes (and executive accountability) to mitigate and manage risks.
2
Commitment to Resolve:
Regulators will view inability to timely remediate supervisory concerns or identified 鈥渨eaknesses鈥�, or continuing, recurring, or increasing deficiencies, as cause to impose increasingly comprehensive and severe actions up to and including limitations on growth and required divestitures. Firms will need to demonstrate a commitment to resolving 鈥渨eaknesses鈥� such as through self-identification, proactive disclosure, completed root cause remediation, voluntary restitution, and executive accountability.聽聽
3
Intangible Risks:
Regulators will expect risk management and governance processes to be adequately resourced (e.g., skilled staff, technology investment); risk management and compliance deficiencies (and particularly during times of 鈥渃ost take-out鈥�) may be seen as indicators of insufficient investment and/or resourcing, increasing both operational and intangible risks. Regulators will identify firms as 鈥減ersistently weak鈥� or 鈥渞epeat offenders鈥� in public enforcement actions, which will subject those firms to heightened reputation risk and may also have implications to the examinations of other regulators. Similarly, requirements or restrictions imposed on firms (e.g., reduction in asset size, additions to capital or liquidity, divestiture of subsidiaries or business lines) may heighten risks related to legal and compliance as well as market share and competition.
Complexity
Expanded regulatory 鈥減erimeters,鈥� innovative technologies, rapidly evolving products and services, growing interconnectedness, and the global political environment are contributing to heightened supervision and examination by all regulators, acting independently and in coordination, at the state, federal, and international levels, significantly enhancing the complexity of regulatory compliance. In 2024, firms will see ongoing and potentially increasing:
- Regulatory Discord: International, federal, and state regulators will differ in public policies, areas of聽 supervisory focus, and regulatory approaches even as they work on the same regulatory concerns,聽 as exemplified by:
- Efforts to promote international regulatory coordination and alignment (e.g., climate disclosure聽 standards, capital and liquidity requirements) amidst U.S.-specific adaptation.
- Multiagency approaches and coordination (i.e., federal 鈥渨hole-of-government鈥� approaches聽 pursuant to the Administration鈥檚 Executive Orders) to address regulatory issues (e.g.,聽 cybersecurity, AI, consumer protection) amidst federal-to-state and state-to-state discord and聽 divergence (and timing).
- Legal Challenge: Challenges to regulatory authorities, jurisdictions, and rulemakings (e.g., CFPB聽 funding structure, SEC climate disclosures, charters for novel institutions, crypto/digital assets) are聽 increasingly expected, raising the level of uncertainty and complexity in the regulatory landscape.聽 Firms will see that to preempt such challenges, regulators now regularly stipulate the agency鈥檚聽 authority to issue regulations and/or take actions.
- Implementation Challenge: The regulatory discord and legal challenges will drive the need for firms聽 to determine the level of direct investment (e.g., infrastructure and systems, people and resources,聽 data) to prepare to comply with supervisory and regulatory expectations that may at present be聽 uncertain or in flux.
1
Regulatory Discord:
International, federal, and state regulators will differ in public policies, areas of supervisory focus, and regulatory approaches even as they work on the same regulatory concerns, as exemplified by:
- Efforts to promote international regulatory coordination and alignment (e.g., climate disclosure standards, capital and liquidity requirements) amidst U.S.-specific adaptation.
- Multi-agency approaches and coordination (i.e., federal 鈥渨hole of government鈥� approaches pursuant to the Administration鈥檚 Executive Orders) to address regulatory issues (e.g., cybersecurity, AI, consumer protection) amidst federal-to-state and state-to-state discord and divergence (and timing).聽
2
Legal Challenge:
Challenges to regulatory authorities, jurisdictions, and rulemakings (e.g., CFPB funding structure, SEC climate disclosures, charters for novel institutions, crypto/digital assets) are increasingly expected, raising the level of uncertainty and complexity in the regulatory landscape. Firms will see that to preempt such challenges, regulators now regularly stipulate the agency鈥檚 authority to issue regulations and/or take actions.
3
Implementation Challenge:
The regulatory discord and legal challenges will drive the need for firms to determine the level of direct investment (e.g., infrastructure and systems, people and resources, data) to prepare to comply with supervisory and regulatory expectations that may at present be uncertain or in flux.
Volume
The ambitious pace for new regulations set by regulators (led by the SEC) in recent years will likely聽 slow in 2024, an election year, as regulators work to finalize existing proposals (some of which are聽 already known to be the object of current and/or anticipated legal challenge). Additionally, 2024 鈥渘et-聽 new鈥� regulations may be thwarted amidst the 鈥渓ookback鈥� period by which Congress might review and聽 disapprove final rules under provisions of the Congressional Review Act (summer 2024). Nevertheless,聽 firms can expect regulatory activity throughout 2024 to encompass:
- New 鈥淏ig Rocks鈥�: Regulators will look to finalize 鈥渟ignificant" new regulations (e.g., banking agency聽 rules on Basel III capital standards, long-term debt requirements, SEC rules on climate disclosure,聽 market structure).
- Old is New: Regulators will continue to vigorously apply existing rules, regulations, and guidance聽 (e.g., heightened standards/ERM, financial stability, AML/BSA, UDAAP/UDAP, fair marketing, conflicts聽 of interest, recordkeeping) to new and emerging areas (e.g., 鈥渁utomated systems,鈥� predictive聽 analytics, crypto and digital assets, digital devices) in supervision and enforcements.
- Supervision and Enforcements Coming: The uptick in supervision and enforcement activities will聽 continue throughout 2024, including:
- Continued/expanded prudential regulatory activity in areas of capital management, liquidity聽 management, enhanced regulatory supervision, enterprise risk management, AML, and integrated聽 data and reporting.
- SEC/FINRA activity in areas of Best Interest, market structures (including Best Execution),聽 cybersecurity risk management, investment adviser supervision, and conflicts of interest.
- Regulators will also signal new areas of supervisory focus and emerging risk through risk alerts,聽 speeches, blogs, and reports.
1
New 鈥淏ig Rocks鈥�:
Regulators will look to finalize 鈥渟ignificant" new regulations (e.g., banking agency rules on Basel III capital standards, long-term debt requirement, SEC rules on climate disclosure, market structure).
2
Old is New:
Regulators will continue to vigorously apply existing rules, regulations, and guidance (e.g., heightened standards/ERM, financial stability, AML/BSA, UDAAP/UDAP, fair marketing, conflicts of interest, recordkeeping) to new and emerging areas (e.g., 鈥渁utomated systems鈥�, predictive analytics, crypto and digital assets, digital devices) in supervision and enforcements.
3
Supervision and Enforcements Coming:
The uptick in supervision and enforcement activities will continue throughout 2024, including:
- Continued/expanded prudential regulatory activity in areas of capital management, liquidity management, enhanced regulatory supervision, enterprise risk management, AML and integrated data and reporting.
- SEC/FINRA activity in areas of Best Interest, market structures (including Best Execution), cybersecurity risk management, investment adviser supervision, and conflicts of interest.
What to Watch
Firms should look for the following items to set expectations about next years鈥� regulatory intensity:
- Regulatory Agendas: Fall and Spring regulatory agendas released by each of the聽 agencies outline rulemaking actions expected to be released in the next twelve months.聽 Fall agendas are typically released in November; Spring agendas in June.
- Supervision/Examination Reports: The publication of regulators鈥� supervisory and聽 regulatory summary reports and priorities, including the FRB Supervision & Regulation聽 Report (November/May) and Financial Stability Report (November/May); OCC Risk聽 Perspectives Report (December/June); FDIC Risk Review (spring); CFPB Supervisory聽 Highlights (biannual); SEC Examination Priorities (January/February); and FINRA Report聽 on Examination and Risk Monitoring Programs (January/February).
- Testimony/Speeches: Congressional testimony related to oversight, pivotal speeches聽 and/or statements indicating emerging risks and/or areas of rulemaking.
- Enforcements/Legal Actions: Public enforcement actions and/or legal actions that聽 outline deficiencies related to compliance with specific laws and regulations as well as聽 remedial actions to take.
Call to Action鈥�
- Allocated sufficient resources: Allocate sufficient investment, resourcing, and time to聽 鈥渞egulatory intensity鈥�, inclusive of, but not exclusively to, net-new regulations. This will often聽 involve strong, centralized regulatory relations and regulatory remediation teams.
- Implement 鈥渞egulatory routines鈥�: Develop and execute on 鈥渞egulatory routines鈥�, inclusive聽 of process automation and data analysis, for consistency and trends (including for regulatory聽 requests and corporate responses).
- Map regulations to risk assessments and controls: Dynamically map regulations and聽 regulatory expectations to risk assessments and risk controls, built on a robust regulatory聽 change management inventory and process.
- Integrate issues management into risk assessments: Integrate regulatory issues聽 management into dynamic risk assessments, with clearly defined ownership and聽 accountability for resolution and critical challenge.
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Ten Key Regulatory Challenges of 2024
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