The global financial crisis and crippling credit crunch that began in 2008 served as a wake-up call to the industry as well as to governments and regulators that continue to call for, enact and implement changes to the regulatory system.

Regulators, along with many other parties, share the blame for the financial crisis. The reasons why the regulatory infrastructure failed are many and varied, including:

1. Segments of the industry and certain financial products were unregulated or under-regulated.
2. Regulatory schemes designed in much different (and simpler) times did not allow for effective oversight of large, complex financial services organizations.
3. Regulators failed to see and react quickly enough to signs that many financial institutions were aggressively growing risky businesses without proper risk management.
4. Regulators focused too much on individual institution risk and not enough on systemic risk.
5. Existing regulatory requirements for capital, loan loss reserve provisioning and valuation practices amplified rather than buffered the impact of financial shocks.

Read the results of Protiviti’s Financial Services Regulatory Reform Survey

In July 2010, the U.S. Congress enacted a law expanding the federal government's role in the markets. The Dodd-Frank Wall Street Reform and Consumer Protection Act is widely considered to be one of the most comprehensive reforms of the U.S. financial industry in decades. As a result of the Dodd-Frank Act along with other new guidance and laws being passed worldwide, financial regulations have been evolving at an unprecedented pace across all segments of the industry. For example:

1. The new international capital standards, Basel III, were released in late 2010 in response to the financial crisis. Additional changes and clarification are expected in 2011. These changes create more opportunities to help clients respond to new requirements, including such areas as capital calculation, credit and operational risk models and methodologies, and risk reporting.
2. Large and systematically important financial institutions in the United States and Europe will be required to develop and maintain resolution plans, or “living wills.”
3. In the United States, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System issued supervisory guidance describing how financial institutions should manage the risks associated with model use. These agencies along with the Federal Deposit Insurance Corporation also issued guidance addressing the use of stress testing as a mitigation tool.

Flash Reports:

1. Are Living Wills a Practical Solution for Too Big to Fail? (June 9, 2011)
2. Model Risk Management: The Office of the Comptroller of the Currency and Board of Governors of the Federal Reserve Release Expanded Supervisory Guidance (May 2, 2011)

One year after passage of the Dodd-Frank Act, U.S. regulators are falling behind in promulgating required regulations and Congress appears to be second-guessing several provisions of the law. These circumstances are creating uncertainty around how some provisions of the law ultimately will be implemented. U.S. regulatory agencies continue to struggle as the intense burden of rulemaking responsibilities compete with the need to grapple with new and merging regulatory bodies, not to mention efforts by the regulators to improve their levels of supervision given the criticism they all faced as a result of the financial crisis. Beyond the delays in rulemaking in the United States, much still remains to be done to level the international supervisory playing field to establish competitive equality and minimize the opportunity for regulatory arbitrage.
 
As a consequence, the level of regulatory change and the challenges financial services companies face is on a massive scale.
 
How Protiviti Is Partnering With Companies to Meet This Challenge

Since the early stages of regulatory reform, we have been encouraging companies to consider how regulatory changes are likely to affect their business and to respond proactively to changes that seem inevitable. In these uncertain times, organizations with strong risk management and an enterprisewide view of compliance will have an advantage because they will be better able to adapt to and manage changing regulations, causing less disruption to their business operations.
 
We can assist companies in analyzing the impact of new rules; determine needed changes and redesign existing processes and practices; assist in implementation efforts; help clients through remediation and enforcement actions; and capitalize on internal audit opportunities to test for compliance. Additionally, given the high rate of change and the need for additional investment in compliance and enterprise risk management functions, we can assist organizations in reviewing and reengineering compliance functions, enabling them to derive more value from compliance activities.

We offer resources for organizations struggling to understand and respond to the law’s still-evolving requirements:

1. Our online Dodd-Frank diagnostic tool enables banks, broker-dealers and mortgage companies to identify quickly the components of Dodd-Frank that are most relevant to their business.
2. Our regulatory intelligence software – The Governance Portal for Regulatory Reform  – helps organizations determine the status of regulatory developments and changes; assess regulatory risk; assign accountability and track status of implementation efforts; monitor and evidence compliance; and demonstrate risk management practices to regulators, customers and other stakeholders.

Our risk and compliance professionals have worked with financial services clients around the world. We create regulatory compliance solutions that align with your business strategy and risk profile. Our multidisciplinary team can ensure your technology infrastructure is supporting your objectives. We also can implement software and controls to improve performance and efficiency. In addition, we have communications professionals who can help you make the cultural changes necessary for effective risk management and compliance.