Supervisory Guidance Update

For you auditors and compliance officers that have been through a few regulatory exams, there is a bit of good news on a subject that has caused confusion over the years. How many times has your institution been criticized by its state or federal examiner for failure to comply with a newly issued or existing supervisory guidance, be it an interagency statement, advisory or other such publication?  In a former role as chief auditor I was the main liaison between my bank and the examiners. On more than one occasion I was told by our primary regulator that they would treat any supervisory guidance as gospel. They stated that if the regulatory authorities went to the trouble of publishing a suggestion, they would treat it as a requirement, and they did on several occasions. But that was a different time and many banks were troubled, so the examiners were a little more protective then. 
Fortunately, the tide is turning, and on September 11, 2018 an Interagency Statement Clarifying the Role of Supervisory Guidance was issued.The agencies issued the statement to explain the role of supervisory guidance and to describe the agencies’ approach to supervisory guidance.
The Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Office of the Comptrollerof the Currency (OCC) (together, the “prudential agencies”) are responsible for promoting safety and soundness and effective consumer compliance at supervised institutions.The Bureau of Consumer Financial Protection (“Bureau,” and, with the prudential agencies, the “agencies”) is generally responsible for regulating the offering and provision of consumer financial products or services under the federal consumer financial laws. (Note: for anyone that did not already know, yes, The Bureau of Consumer Financial Protection is what we know of as the CFPB, leave it to Washington to rearrange the name, maybe they wanted to keep it in alphabetical order for bureaucratic simplicity). 
Below is an excerpt from the interagency statement noting the difference between supervisory guidance and laws or regulations:
The agencies issue various types of supervisory guidance, including interagency statements, advisories, bulletins, policy statements, questions and answers, and frequently asked questions, to their respective supervised institutions.A law or regulation has the force and effect of law.Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance. Rather, supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area.Supervisory guidance often provides examples of practices that the agencies generally consider consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers.  
The interagency statement also included 5 ongoing agency efforts to help clarify policies and practices related to supervisory guidance:
The agencies intend to limit the use of numerical thresholds or other “bright-lines” in describing expectations in supervisory guidance.Where numerical thresholds are used, the agencies intend to clarify that the thresholds are exemplary only and not suggestive of requirements.  The agencies will continue to use numerical thresholds to tailor, and otherwise make clear, the applicability of supervisory guidance or programs to supervised institutions, and as required by statute.

  • Examiners will not criticize a supervised financial institution for a “violation” of supervisory guidance.  Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions. During examinations and other supervisory activities, examiners may identify unsafe or unsound practices or other deficiencies in risk management, including compliance risk management, or other areas that do not constitute violations of law or regulation.In some situations, examiners may reference (including in writing) supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations.
  • The agencies also have at times sought, and may continue to seek, public comment on supervisory guidance.Seeking public comment on supervisory guidance does not mean that the guidance is intended to be a regulation or have the force and effect of law.The comment process helps the agencies to improve their understanding of an issue, to gather information on institutions’ risk management practices, or to seek ways to achieve a supervisory objective most effectively and with the least burden on institutions.
  • The agencies will aim to reduce the issuance of multiple supervisory guidance documents on the same topic and will generally limit such multiple issuances going forward.
  • The agencies will continue efforts to make the role of supervisory guidance clear in their communications to examiners and to supervised financial institutions and encourage supervised institutions with questions about this statement orany applicable supervisory guidance to discuss the questions with their appropriate agency contact.
I applaud the agencies for their effort to eliminate the confusion between a guidance and law or regulation, but it will only be successful if the last bullet point on the interagency statement is fully embraced. Making this statement clear to the examination teams in the field as well as the financial institutions is imperative. Violations for a supervisory guidance have to be nixed at the field level for this statement to have substance.  So, remember if you run into an uninformed examiner that wants to criticize or write a violation for a guidance rather than law or regulation, you can simply direct them to the 9/11/18 Interagency Statement. This Interagency Statement is a win for the good guys.   

by Bart Hall