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Enhanced prudential standards for US foreign banking organizationsIs your compliance program ready?
1 | Enhanced prudential standards for US foreign banking organizations
Aiming to address weaknesses in the US
financial system and strengthen financial
resiliency, the Dodd-Frank Act was signed into
law in 2010, in the wake of the global financial
crisis. Section 165 of the act provided the
Federal Reserve (the Fed) with the authority
to institute enhanced prudential standards
for nonbank financial companies, certain bank
holding companies (BHCs) and foreign banking
organizations (FBOs).
The Fed finalized the standards on February 18,
2014, to implement Section 165 for both large US
BHCs and FBOs. Standards include the following:
• Risk-based capital requirements and leverage limits
• Liquidity requirements
• Overall risk management requirements
• Resolution plan and credit exposure report requirements
• Concentration limits
• Stress tests
• Standards for foreign financial companies
This booklet focuses on the overall risk
management requirements, particularly
those related to compliance.
2Enhanced prudential standards for US foreign banking organizations |
Overall risk management requirementsFBOs with a significant US presence must establish an intermediate holding company (IHC) to facilitate comprehensive supervision over the FBO’s US operations and centrally govern risk management of US activities, including compliance risk.
The enhanced risk management standards will apply to IHCs established by FBOs. The IHC’s compliance function must develop an IHC compliance program. IHC compliance requirements are expected to be similar to those applicable to BHCs under the Fed’s Supervision and Regulation Letter SR 08-8 (Compliance Risk Management Programs and Oversight at Large Banking Organizations with Complex Compliance Profiles).
What should FBOs do now?Going forward, the Fed will expect a consolidated risk management framework for FBOs at the IHC level covering US activities (e.g., BHC-like), including compliance. FBOs should consider four key areas of the compliance risk management approach (highlighted in SR 08-8) as they assess the scope and structure of their existing compliance risk management framework to address IHC requirements:
• Firmwide approach to compliance risk management and oversight
• Independence, stature and influence of compliance staff
• Sound practices for compliance monitoring and testing
• Responsibility of board and senior management for risk management and oversight
3 | Enhanced prudential standards for US foreign banking organizations
To translate the above key areas into elements of success, FBOs should assess whether there is a comprehensive approach for the following:
1 • Roles and responsibilities for IHC compliance oversight
• Reporting relationships between the global chief compliance officer (CCO), IHC compliance leader and line of business (LOB) CCOs
• Stature, authority and independence
• Escalation and reporting protocols
• Compliance coverage of IHC
• Communication and reporting between compliance, senior management and the board
• Role of compliance in legal entities (LEs) and LOBs, considering the new structure
2• Standards for consistency in application and approach across
US LOBs to address similar risk issues, share a common view of compliance risk and facilitate oversight across the IHC
• Criteria to define scope of compliance coverage
• Roles and responsibilities of compliance and other functions
• Set of activities performed by compliance
• A reporting framework and process for normalizing and aggregating information across the IHC
Board
IHC
Non
-US
US
Enterprise team
Seniormanagement
Consistent standardsacross US LOBs
LOBcompliance
Agg
rega
te, a
naly
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nd r
epor
t
LOBcompliance
Set s
trat
egic
vis
ion
and
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ritie
s
LOBcompliance
Organizational structure
Enterprise-wide approach
Enterprise team
US LE 1 US LE 2 US LE 3
IHC
Parent
LE view:
US LOB 1CCO
US LOB 2CCO
US LOB 3CCO
Head office
US region
LOB view:
4Enhanced prudential standards for US foreign banking organizations |
3The US program should:
• Address a set of integrated activities to identify, assess, control, measure, monitor and report on compliance risk
• Support execution of the program with sufficient resources of the requisite knowledge, expertise and skills
• Enhance systems and technologies for integrated and consistent coverage of compliance processes across IHC entities
Compliance life cycle
RiskassessmentInventory
A. Identifying regulations and assessing
Technology enablement
Reporting
D. Communicationand reporting
Issuetracking andescalation
Testing
C. Compliance monitoring
Monitoringsurveillance
B. Policy framework
Business linesOperationsTechnologyRegulators
Advisory activities
Organization, statureand objectivity
TrainingPolicies
Governance and oversight
Considering the components of the compliance life cycle will help firms demonstrate and facilitate a unified and comprehensive compliance risk management framework at the IHC level.
5 | Enhanced prudential standards for US foreign banking organizations
How we can helpOur Regulatory Compliance team brings deep experience in current supervisory expectations and the range of practices in the financial services industry. Specifically, we can assist with compliance function strategy and design reviews to help our clients identify practical opportunities for improvement. The reviews provide an independent perspective on issues, gaps and benefits related to the current compliance structure, as well as recommendations for enhancements.
In addition, we have facilitated workshops with compliance management to create action plans to remediate issues identified through our reviews and to determine the direction of the organization moving forward. Our team has also provided numerous educational sessions for compliance organizations in the areas of supervisory expectations, strategic planning, execution of key compliance activities and the scope of compliance.
We have also assisted clients with aligning their organizations to supervisory expectations and industry practices through the creation of a target operating model. The intent of the target operating model is to create a compliance organization that enables stronger governance and oversight, promotes consistency and standardization of approach, and clearly delineates roles and responsibilities across the organization.
Timeline
Final rule implementation dates
2014 2015 2016
2/18/2014:Final rule released
1/1/2015:US IHCimplementationplan due
7/1/2016:US IHCformation, in compliance with risk governance requirements
Ernst & Young LLP contactsMichael R. Patterson Principal, Advisory Financial Services +1 212 773 2824 [email protected]
Madeline Miller Executive Director, Advisory Financial Services +1 212 773 7615 [email protected]
Christopher A. Maher Principal, Advisory Financial Services +1 212 773 6524 [email protected]
6Enhanced prudential standards for US foreign banking organizations |
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SCORE No. CK08791412-1369442 NYED None
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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