BY DENNIS CHILD
Is the small size of your credit union getting in the way of your regulatory compliance? Staying viable under the present regulatory environment is proving a challenge for many CUs. But that doesn’t mean you have to lay down the gauntlet. Outsourcing could be the key to continued operational efficiency.
There is mounting evidence that the present regulatory environment is making it almost impossible for mid-size to small credit unions to meet compliance expectations and stay in business. Regulatory burdens are harming credit unions in a couple of ways: (1) the cost of compliance is driving credit unions out of business and (2) failure to comply can result in the loss of a CEO’s job and/or the demise of a credit union. Small and mid-size credit unions particularly will need to find methods to help them cope with the growing burden of regulatory compliance if they hope to remain viable.
Credit unions under $250 million especially are struggling to sustain growth and profitability due to growing regulatory compliance requirements. They would clearly benefit from resources that are now available to help with compliance issues. Let’s look at some facts supporting these affirmations:
190 regulatory changes occur in eight years.
CUNA reports that since 2008, credit unions have been subjected to more than 190 regulatory changes from nearly three dozen federal agencies, totaling nearly 6,000 Federal Register pages.
CEOs are worried.
A 2014 survey of credit unions by CUNA indicates that regulatory burden is one of the top three worries for managers and boards.
More regulations are resulting in fewer credit unions.
The number of credit unions in the U.S. has dropped 40 percent in the past 10 years. Most of this decrease is accounted for by the number of small credit unions merging into larger credit unions or the reduction in the formation of new credit unions. It is predicted that there will be another 40 percent drop in the number of credit unions in the next 10 years. Government figures indicate that the country is losing one credit union or community bank each day. NAFCU contends that the passing of Dodd-Frank alone has accounted for the loss of 1,250 credit unions.
Regulations are straining human resources.
It takes more staff just to meet the compliance demands for regulations passed since 2013. Continuity, a New Haven, Connecticut-based provider of automated compliance solutions, reports that credit unions needed 1.35 additional employees just to address the new regulations issued during the first three months of 2015. To address regulations and enforcement actions handed down in the past two years, credit unions would have had to add 14 additional employees. Larger credit unions can accommodate this expense with moderate sacrifice. For small credit unions, however, it poses a significant strain on staff resources and profitability.
Regulatory costs are massive.
A CUNA study shows credit unions were hit with regulatory compliance costs of $6.6 billion in 2014. This same study confirms that compliance costs are reducing ROA by 49 basis points for an average-sized credit union. Compliance costs make up 20 percent of total operating expenses and 40 percent of staff expenses. Obviously, for small credit unions, the impact on the bottom line is significantly higher. Lost opportunity costs make the losses even greater.
Credit unions cope with regulations that are not necessarily beneficial to consumers and “the financial system.”
Large credit unions have enjoyed significant growth in their loan portfolios in the past three years. Small credit unions have not enjoyed the same revenue-sustaining loan growth as their larger brethren. In fact, Continuity reports that small credit unions are abandoning lines of business just because they cannot keep up with the time and cost it takes to comply with the rules governing those lines of business. These abandoned lines of business could well have contributed to the profitability of those credit unions. Regulatory compliance is indeed an expense. But it is not a cost with any form of “return-on-expense” that is associated with most other operational expenses. It can be argued that the real losers in an environment of onerous regulatory growth are the consumers as their community credit unions disappear and services are reduced.
Furthermore, it is argued by many industry pundits that more regulation does not necessarily benefit consumers – contrary to reasons given for passing many regulations. In fact, many argue that it was poorly drafted and misdirected regulations that led to the 2008 downfall of many financial institutions, the “Great Recession” and “tax-payer funded bailouts.” In a final irony, the 2008 panic has led to still more regulations of questionable benefit and an additional regulator for financial institutions to cope with, the Consumer Financial Protection Bureau. More regulations and additional regulators ultimately could well result in a complete loss of autonomy for financial institutions. Fortunately, while an individual credit union may not be able to do much about the growing number of regulations, management can do something about the burden of compliance.
Regulations are hurting employees of small credit unions.
The burden of new regulations and the expense of the compliance is hurting employees of small credit unions in a couple of ways: (1) they are being pushed into health plans as a result of the Affordable Care Act that are not as beneficial as the health plans they had before; and (2) when credit unions merge, employees of the absorbed credit union often are allocated to less attractive positions or experience loss of their jobs altogether – this is especially true of management staff. For management staff of struggling credit unions, the stress can be overbearing as they contemplate the possibility of a merger.
Furthermore, struggling credit unions are hard pressed to pay competitive wages. This means competent employees are making a personal sacrifice on behalf of their employer, or more commonly, a credit union will need to settle for less-competent employees, which places more strain on management and/or means a poorer level of service for members who eventually take their business elsewhere. In turn, the downward spiral of the credit union is further accelerated. Relief from the burdens of regulatory compliance would benefit employees at all levels.
CEOs are devoting more time to compliance and less time to the traditional duties of a CEO.
CEOs of mid to small credit unions report that they are spending much of their time addressing compliance issues and as a result are able to devote less time to operational efficiency and revenue-generation issues. Indeed, CEOs of small credit unions take on the role of compliance officer themselves because they cannot afford to hire staff devoted exclusively to regulatory compliance. This means the majority of a CEO’s time is no longer being used as it should be.
Outsourcing compliance could be the most efficacious alternative for a small credit union.
CEOs need to consider the benefits of outsourcing regulatory compliance so they can get back to what they were hired to do – manage operations and generate revenue.
Compliance is a growing profession. Other than the Bank Secrecy Act, there is no formal requirement to employ compliance staff. Competent compliance-officer employees require constant training and education. Most small credit unions cannot afford the cost of hiring specialized staff and keeping those employees to the required proficiency levels that assure regulatory compliance. Outsourcing compliance is most likely a small credit union’s most efficient method to meet regulations while maximizing limited resources.
There are a growing number of firms that provide regulatory compliance services. When considering which firms would best meet their needs, credit union CEOs should consider:
- The number of years the firm has been in business and the level of experience the staff have in dealing with credit union management services and compliance
- Those credit unions the firm provides training and compliance services for – Look for testimonials from present clients. Also look for firms that have been vetted by regulatory agencies.
- Giving special consideration to firms that have experience in training employees of regulatory agencies
- Firms that can also provide risk management services, revenue enhancement tools and so forth
- Who owns the firm? – Is it owned by credit unions (CUSOs) for the sole benefit of credit unions or is it owned by non-credit-union entities?
- The expanse of regulations the firm specializes in – The broader the field a firm can address, the better it can coordinate compliance issues.
- Other compliance-related services the firm can provide, such as auditing and drafting regulatory-compliant policies and procedures, staff and volunteer training, and so forth
Today’s onerous burden of regulatory compliance need not be the death knell for small credit unions. For decades, credit unions have benefited from outsourcing a number of operational and revenue-generating objectives, thus assuring their ability to operate at the most efficient level possible. It is time to add regulatory compliance to the list of outsourced functions.
Dennis Child, Compliance Specialist, TCT Risk Solutions, LLC is also a member of VirtualCorps.com. The CUSO TCT Risk Solutions can be reached by contacting email@example.com or 406-315-2809.