For some time now, training has been well established as one of the pillars of a sound compliance program. As examiners began to take a risk-based approach to supervision, the importance of training began to grow and come into focus. Regulatory guidance as early as 2002 talks about the importance of training for staff:
“The importance of having a staff that is knowledgeable of regulatory requirements cannot be overstated. Regardless of an institution’s philosophy and policies, ultimately it is line staff who process transactions and interact with customers. If employees are not adequately trained in compliance matters, errors are certain to occur.”
And while it is generally easy to acknowledge the need for staff training, the need for executive management and the Board to receive training is an area that is often overlooked. In point of fact, there are very few areas where Board training is required, [Bank Secrecy Act-Regulations are one of the few that actually require annual training], but in most areas training is a best practice.
It would be unreasonable to expect that Executive Management and the Board should receive training with the same level of granularity as staff. However, it has become increasingly clear that it is equally unreasonable to expect that Executive management and the Board can effectively supervise the overall operations of the Bank without a clear understanding of what the basic requirements for compliance might be!
We were recently called into a Bank that was facing serious regulatory action. The main concern that the regulators expressed was that the Bank was far too slow in acting to address the concerns raised in previous examination. Our client was incredulous at this assessment because at the conclusion of the previous examination, they made changes in management, hired additional staff and outsourced the publication of new policies and procedures. While most would agree that these are dramatic actions on the part of the Board, there is another part to the story.
It seems that the new manager and the new Vice President hired by the Board both looked very good on paper, but in terms of execution, there was a great deal lacking. Even though the new employees provided the Board with reports on a quarterly basis, and included in the report that the Bank was on the right track-no actual progress was being made! In point of fact, neither the new Manager nor the new Vice President was capable of addressing the concerns recognized by prior examiners and the Board was unable to recognize the deficit until items were pointed out in the next examination. No surprise then that the conclusion of the subsequent examination, resulted in serious enforcement actions being assessed.
One of the main concerns cited by the Examiners was Executive Managements’ inability to discern the competence level (or lack thereof) of their new hires. This is, at its core, a training issue! If the Board had more than a minimal amount of knowledge in the specific area of operations, they would have known what questions to ask to determine the true level of progress being made in response to the examiners’ findings. The Board of Directors is responsible for the success and/or failure of a bank, and, as we learned in the 1980’s untrained bank directors can lead to the failure of a bank.
The overall supervision and direction of a Bank depends on the course set by the most senior management and the Board of that Bank. A bank is recognized as being an integral part of the community they serve. A community relies on their bank to help with job creation, loans, and investments, and this impacts how the community’s economic system churns. Communities also depend on their bank to provide a safe system to transfer money between individuals and businesses alike. However; being such an active part of the community presents certain risks and among those risks are:
So now that we have identified a few of the risks, what does this have to do with effective Board of Director training?
We have all become familiar with the term “Risk Management” and effective risk management is essential to a strong bank. Examiners place great importance on sound risk management practices when analyzing the activities and services of a bank. Strong internal controls are essential to sound risk management and examiners are starting at the top when assessing the risk associated with bank operations, and the “top” isn’t bank management, it’s the Board of Directors. The Board of Director’s are ultimately responsible for the bank and if an examiner uses the term “unsafe and unsound” you can rest assured the issue is very serious, and usually requires some form of immediate corrective action and/or a response from the Board of Directors.
Directors are not required to know, or be involved in the normal day-to-day management and operations of the bank each board member should be involved through the strategic plan of the bank which: determines the bank’s direction; provides guidance on how the bank will conduct business; and address the products the bank might offer. The policies adopted by the Board of Directors will set the risk limits acceptable to the bank for the products the bank offers. This risk management responsibility requires knowledge of, at the very least, the following:
All of these areas require some level of training and as one of the lessons learned from past successes (and failures), when Board of Director oversight is strong, problems are: more quickly recognized; fewer; less severe; and addressed more effectively with less chance of being repeated. In our experience, an effectively trained Board of Directors has a very positive impact on the health of a bank, and now, more than ever, bank directors have a great responsibility to the bank’s they serve. A bank director’s role in this economic environment is challenging, yet filled with great opportunity. Banks and their Board of Directors are faced with the all sorts of challenges: making the bank profitable; keeping shareholders happy; providing effective oversight and guidance, all without having an intimate knowledge of the bank’s daily operations. To overcome these challenges, we recommend that the training program for Executive level management and the Board be a consistent and formal program focusing attention on key banking operations and current compliance issues. Including an ongoing training session as a standing item on the Board agenda will allow training to be consistent and allow the sessions to be conducted in short concise segments.
Training is not simply a throw away issue. A strong compliance program requires that Executive Management and the Board remain well informed.
The professionals at Chartwell Compliance provide comprehensive training programs customized to fit the needs of your bank. Please contact Chartwell at www.chartellcompliance.com for training designed around your organization.