Regulatory Intensity

Firms should anticipate: 

• Immediate Action: Growing scrutiny of “weaknesses” in risk management and compliance, especially with regard to correcting deficiencies, will drive regulators to more stringent evaluations, possible ratings downgrades, and/or supervisory and enforcement actions. Firms will need to show both immediate assessment and resources to address potential weaknesses, as well as sustained processes (and executive accountability) to mitigate and manage risks.
• Commitment to Resolve: Regulators will view inability to timely remediate supervisory concerns or identified “weaknesses,” or continuing, recurring, or increasing deficiencies, as cause to impose increasingly comprehensive and severe actions up to and including limitations on growth and required divestitures. Firms will need to demonstrate a commitment to resolving “weaknesses” such as through self-identification, proactive disclosure, completed root cause remediation, voluntary restitution, and executive accountability.
  
• Intangible Risks: Regulators will expect risk management and governance processes to be adequately resourced (e.g., skilled staff, technology investment); risk management and compliance deficiencies (and particularly during times of “cost take-out”) may be seen as indicators of insufficient investment and/or resourcing, increasing both operational and intangible risks. Regulators will identify firms as “persistently weak” or “repeat offenders” in public enforcement actions, which will subject those firms to heightened reputation risk and may also have implications to the examinations of other regulators. Similarly, requirements or restrictions imposed on firms (e.g., reduction in asset size, additions to capital or liquidity, divestiture of subsidiaries or business lines) may heighten risks related to legal and compliance as well as market share and competition.

• Regulatory Discord: International, federal, and state regulators will differ in public policies, areas of  supervisory focus, and regulatory approaches even as they work on the same regulatory concerns,  as exemplified by:
  • Efforts to promote international regulatory coordination and alignment (e.g., climate disclosure  standards, capital and liquidity requirements) amidst U.S.-specific adaptation.
  • Multiagency approaches and coordination (i.e., federal “whole-of-government” approaches  pursuant to the Administration’s Executive Orders) to address regulatory issues (e.g.,  cybersecurity, AI, consumer protection) amidst federal-to-state and state-to-state discord and  divergence (and timing).
• Legal Challenge: Challenges to regulatory authorities, jurisdictions, and rulemakings (e.g., CFPB  funding structure, SEC climate disclosures, charters for novel institutions, crypto/digital assets) are  increasingly expected, raising the level of uncertainty and complexity in the regulatory landscape.  Firms will see that to preempt such challenges, regulators now regularly stipulate the agency’s  authority to issue regulations and/or take actions.
• Implementation Challenge: The regulatory discord and legal challenges will drive the need for firms  to determine the level of direct investment (e.g., infrastructure and systems, people and resources,  data) to prepare to comply with supervisory and regulatory expectations that may at present be  uncertain or in flux.

• New “Big Rocks”: Regulators will look to finalize “significant" new regulations (e.g., banking agency  rules on Basel III capital standards, long-term debt requirements, SEC rules on climate disclosure,  market structure).
• Old is New: Regulators will continue to vigorously apply existing rules, regulations, and guidance  (e.g., heightened standards/ERM, financial stability, AML/BSA, UDAAP/UDAP, fair marketing, conflicts  of interest, recordkeeping) to new and emerging areas (e.g., “automated systems,” predictive  analytics, crypto and digital assets, digital devices) in supervision and enforcements.
• Supervision and Enforcements Coming: The uptick in supervision and enforcement activities will  continue throughout 2024, including:
  • Continued/expanded prudential regulatory activity in areas of capital management, liquidity  management, enhanced regulatory supervision, enterprise risk management, AML, and integrated  data and reporting.
  • SEC/FINRA activity in areas of Best Interest, market structures (including Best Execution),  cybersecurity risk management, investment adviser supervision, and conflicts of interest.
• Regulators will also signal new areas of supervisory focus and emerging risk through risk alerts,  speeches, blogs, and reports.