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FERC Enforcement Actions Will Push Compliance Units into Overdrive

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Recently, the Federal Energy Regulatory Commission joined the parade of federal regulatory agencies launching major investigations against banks for alleged wrongdoings. The actions by FERC are those of a newly formed enforcement department entering banking for the first time that can leverage huge penalties against major banks.

FERC, new to banking regulation, has a long history of levying large fines on firms in the production, transmission and trading of electrical power. Its ability to fine at $1 million per day of transgression can be a huge lever and removes the usual bank approach of "let's talk and settle" to definite limitations. 

FERC's recent actions, along with the confusion created by both the Consumer Financial Protection Bureau on mortgages, and the ongoing argument between the Securities and Exchange Commission and the Commodity Futures Trading Commission on defining a 'U.S. person' in forex swap trading, have added to the already huge burdens on compliance staffs tasked with understanding and effectively managing internal and external compliance risks.

Whether a bank or other financial institution is currently engaged in trading electricity or any commodities from chewing gum base to gold bullion, the boards of directors and top management will have to spend valuable time on the issues raised by the new regulatory actions. Internal audit, legal, risk management and especially compliance units will have to examine and redefine the relevance of the risks from the new agency's rulings and the potential impact of a long list of other external risks. Carefully identifying these risks will also help define the policies and procedures required for an effective internal governance program.

The negative impacts on banking operations from the regulation tsunami have been well documented. Of special concern is the impact on the smaller, community banks. If the largest banks are unable to cope with the regulatory challenges with their significant financial structures and huge staffs, how can the smaller banks hope to cope with the same regulatory requirements? 

The influx of instructions – all regulatory agencies have ''manuals'' describing what they want and expect –  regarding how banks should be organizing, staffing and training personnel for effective compliance management has been monumental. The role of the compliance unit has had to take on a new and broader approach to risk management requirements. These new requirements have taken the compliance unit from its former lesser importance in the overall governance scheme to requiring top management and board recognition.

Quality definitions appears to be based on how the organization's staffing and especially training programs for risk and compliance units meet the regulators' stated goals. The role of the internal audit has also taken on a new importance. In reality, the regulators are now telling banks how to run their business.

Most banks, especially community banks, have been bewildered by the immenseness and complexity of the new mandates and their ensuing regulations. How to effectively organize and train staffs is not only costly, but has created significant challenges.The cumulative levels of uncertainty at all banking levels have brought lending needs and lending reluctance to a near grid-lock level.

The federal government will not be able to achieve new levels of national economic and job growth through increased investment unless the amount and complexities of regulations are reduced. Adding FERC's apparent interest in the industry and threatening bigger fines only requires banks to set aside even larger sums for potential fines.

FERC by its entry into banking merely exacerbates the existing uncertainty and impacts every level of banking risk, the costs of doing business and the amount of ''free'' funds available for loans and investments.

It is long overdue for a top level summit where leaders of banks and other financial institutions can meet with leaders of the executive and legislative branches of government to openly and objectively discuss the goals for the financial sector in a growing economy, and the role of effective and efficient regulation aimed at optimal economic growth. 

John Alan James is executive director of the Center for Global Governance, Reporting and Regulation at Pace University
's Lubin School of Business in New York City. James is also program director of the Certified Compliance and Regulatory Professional certificate program, a joint venture between the Pace Center and the Association of International Bank Auditors.

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