My guests today are two of the most thoughtful people in the United States on the topic of regulatory compliance. They are the chief compliance officers of Citigroup and Wells Fargo – Kathryn Reimann and Yvette Hollingsworth Clark.
Our listeners include a lot of people who are not fascinated by the topic of regulatory compliance, to put it mildly. The fact is, though, that compliance has shifted, rather suddenly, from being boring to most people, to being fascinating. And whether it fascinates you or not, it has become absolutely critical to whether financial companies can thrive. Becoming great at compliance – both effective and efficient -- has become mission-critical competencies for every financial company, large and small.
Let’s step back and think about what’s happening. Technology is disrupting finance, which means that it’s also disrupting financial regulation, which therefore means that it’s also disrupting compliance, inevitably. It will completely change how financial companies implement the massive set of regulatory requirements that pervade every aspect of what they do.
This is going to be – already is – a wrenching process. For better or worse, consumer financial protection regulation has always been hypertechnical. built mainly around highly prescriptive rules. Congress passes laws, the regulatory agencies issue regulations to implement them, and the industry implements the regulations. I’ve spent much of my career in this field and have watched it mature into a major function – major cost center – in every bank, into a profession of experts, and into an industry of technology vendors and consultants and lawyers who help financial companies follow these rules. With a few exceptions, the system is about getting the details right.
That’s still true, of course. We still have voluminous, detailed rules aimed at consumer protection. But the financial crisis shifted the ground under this whole system, by supplementing the traditional “rules-based” system with a new “principles-based” overlay that aggressively requires that financial products be not only “compliant,” but also “fair” – able to meet heightened prohibitions on practices that are unfair, deception or abusive (which we in the compliance world, with our habit of using acornyms, call, “UDAAP.”
And then, as if that weren’t a big enough change, the financial world has now also been hit with a second huge wave of change, in technology innovation. And it’s even more challenging than the shift from rules to principles, because it’s coming faster, and it’s even more unknowable than regulatory change.
All this means we’ve entered into a state of permanent uncertainty. The products and market and technology are changing too fast for the legislative and regulatory process to keep pace. The regulatory process can’t, and won’t, provide clarity on exactly what the industry has to do. Instead, it will review what has been done and will, after the fact, penalize actions that are judged to have been illegal because they’re subjectively determined to have been unfair, deceptive, abusive, or discriminatory in effect.
The result is that financial companies are going to have to build a whole new kind of compliance model. They won’t have the luxury of waiting for clear-cut rules. They’ll have to figure out for themselves how regulators may react to rapid change, and make their own decisions, in the absence of clear guidance, about what is risky.
This requires a full overhaul of the traditional compliance model. For one thing, it means deeply, actively engaging the CEO, the board, and the business-side leadership of every company in proactively managing regulatory risk. They can’t delegate it and assume that their experts and technology will take care of it. They have to make their own decisions, and they have to do it not reactively, but proactively. Again, they’ll have to think for themselves.
And they’ll also have to adopt a new generation of regtech solutions, which are starting to emerge to improve outcomes and cut costs.
There’s a lot to say about what’s ahead on all this, but for today, we’re going to pick the brains of two of the most impressive leaders anywhere in the compliance world. Yvette Hollingsworth Clark is the chief compliance officer of Wells Fargo, and Kathryn Reimann leads this work for Citigroup. I’ve known them both for years, and I was lucky enough to catch them together while we were all at the same event, and carve out some time to talk.
Listen to their views on how compliance is changing, the impact of technology, and the need to bring a “fairness” lens to absolutely every regulatory question. They talk about how to do that, including how to integrate teams that can bake it into daily decision-making. They talk about the challenges arising because of the accelerating the speed of change. And they discuss the challenges of working with old legacy IT systems that were created long before today’s regulations and technology. They talk about the need for a level regulatory playing field for banks and nonbanks, how to work with regulators, and advice for regulators. They also talk about their own journeys – Kathryn notes that when she started working as a lawyer, the compliance profession didn’t even exist.
We’ve come a long way.
These are people who are pioneering new ways of tackling compliance. They’re doing it in some of the world’s biggest, most complex, and most highly-regulated companies, but their insights apply to every financial company – large and small, and old or brand new.
Vote for my panel on the SXSW PanelPicker!
I need your help getting my panel selected for inclusion in South By Southwest – SXSW – the huge technology conference that runs in Austin TX each year in conjunction with the famous music and film festival. I attended SXSW (“South by,” as people call it) for the first time last year, and it was absolutely fascinating. It’s unique among the conferences I attend, in that it’s broader than finance. It’s about technology overall. I believe fintech is more tech than fin, in the sense that it’s being driven by enormous and converging technology trends. We in the financial realm tend to underestimate how big these are and how fast they’re moving, because we think of them in terms of the financial products they’re reshaping – but they’re much bigger than those. SX is a great place to go to learn and think about these wider trends, while also seeing the most interesting new things emerging in fintech, as well.
So I have proposed a panel discussion there on RegTech – the shift toward using new generation technology to get to win/wins on regulation, by reducing regulatory costs and burdens while improving outcomes for customers at the same time. I’m calling the panel REGULATION INNOVATION and my amazing guests will be Josh Reich, the CEO of Simple; Jennifer Tescher, CEO of CFSI; and Adrienne Harris of the White House.
Last year, SX received 4,600 proposals, so, I need you to vote for the session on the SX Panel Picker. Voting opens up on Monday, August 8 and closes September 2. Please Google the SXSW PanelPicker during that time period, and vote for session called Regulation Innovation. And then plan to come to SX, which is 3/6-10 in Austin. I’ve been thinking maybe we should take a group of financial folks. What do you think?
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We’ll see you soon with some incredibly interesting new guests – startups, banks, and even someone from Harvard. Til next time!
As Kathryn rightly states, such an overhaul of the system requires updating perspectives of themselves and of their hires. It also requires a great degree of inter-departmental collaboration and communication. This is something that I have seen to be true all across the map of regulation - open dialogue is essential. In a previous podcast, Thomas Curry, the Comptroller of Currency and head of the taskforce on responsible innovation agrees.
Kathryn and Yvette explain that compliance officers have a very tough job ahead, and I couldn't agree more. They have to balance a fine line between assessing and preventing massive risk from such huge amounts of data sharing while not becoming an obstacle to innovation. As Yvette states, we want to use innovation to regulate innovation.