Financial institutions: Top regulatory compliance developments to monitor in 2023

Anti-money laundering act

On Jan. 1, 2021, the Anti-Money Laundering Act of 2020 (AMLA) was signed into law and includes significant reforms to AML legislation. The AMLA seeks to strengthen, modernize, and streamline the existing AML regime through the provisions within the following five titles:

• LXI — Strengthening Treasury Financial Intelligence, AML, and Counter-Terrorism Financing (CTF) Programs
• LXII — Modernizing the AML and CTF Reporting System
• LXIII — Improving AML and CTF Communication, Oversight, and Processes
• LXIV — Establishing Beneficial Ownership Information Reporting Requirements
• LXV — Miscellaneous

While the Financial Crimes Enforcement Network (FinCEN) — the primary agency responsible for implementing the majority of the AMLA — has finalized efforts on select provisions, several others are pending progress updates or amid the rulemaking process.

Section 1071

The final rule for small business data collection requirements is due to be issued no later than March 31, 2023. Once the final rule is announced, institutions subject to these data collection requirements will have 18 months to implement the processes necessary to start collecting this additional data. As of Sept. 1, 2022, the proposed rule indicates institutions that have originated at least 25 covered credit transactions to small businesses in each of the two preceding calendar years would be subject to the rule. This means a great majority of community financial institutions will have a short period of time to undertake one of the most demanding data collection efforts yet to be put forth by regulators.

Fintech

As demonstrated in a recent survey commissioned by the American Bankers Association endorsed solutions provider Q2, fintech partnerships aren’t going anywhere. Sixty-one percent of respondents see fintech partnerships as the most important part of their growth strategies or at least a key component. While these relationships can offer several advantages, they also introduce a third-party that’s often unregulated, which may result in new or heightened risks. Regulatory agencies are reacting by introducing enhanced risk management expectations for financial institutions and expanding the regulatory perimeter to require regular risk assessment updates and continual change management.

Overdrafts

Financial institution practices relating to overdrafts will remain a key focus for regulators in 2023. With some larger institutions limiting overdraft fees or eliminating them altogether, regulators want to understand what community financial institutions are doing to protect customers from unnecessary overdraft fees. Regulatory bodies have indicated banks need to make corrective action for overdraft re-presentments in advance of any scheduled compliance exam. The Consumer Financial Protection Bureau has also recently announced that it is targeting fees charged for items returned unpaid. In addition to the regulatory risk, plaintiffs’ attorneys continue to look for opportunities to bring legal action regarding overdraft fees resulting from re-presented items.

Cryptocurrency transaction monitoring

As investment in cryptocurrency grows (along with uncertainty), the potential for new transaction behaviors and suspicious activity grows exponentially. The regulatorily required prevention and detection of money laundering activity often falls to an institution’s transaction monitoring program. Coupled with enhanced due diligence requirements, institutions must know their customers and identify potentially suspicious transactional behavior. The underlying transactional data is a valuable resource to identify those risks and address them before it’s too late.

Appraisal bias

While fair lending has been a priority for many financial institutions in the last few years, several studies have recently been released demonstrating the pervasiveness of appraisal bias in the marketplace. Appraisal bias often results when an appraiser assigns a lesser value to a home based on its location or the race of the homeowners. This bias not only impacts lending transactions but also generational wealth, considering how significant an asset real estate can be. Financial institutions are just beginning to grapple with how appraiser bias might be addressed, as failure to do so can result in a new kind of redlining.

Environmental, social, and governance

Specific environmental, social, and governance (ESG) regulatory guidelines for financial institutions haven’t been provided; however, regulatory agencies have acknowledged the financial risk presented by climate change and have issued draft principles that provide insight into the expectations to come. While the primary focus remains on climate change, other aspects of ESG priorities are gaining momentum. Recent remarks by the Acting Comptroller of the Office of the Comptroller of the Currency indicates cooperation may increase among regulatory agencies as more detailed guidance is developed. This is expected in 2023.

Updating your CMS for cryptocurrency

Digital assets have gone from novelty to a more acceptable form of transaction and investment. Does your compliance program provide sufficient coverage for digital asset activity and address the unique risks and associated regulatory requirements? Regulatory guidance requires institutions to address any known compliance risks, and cryptocurrency provides another level of risk never before seen. The current administration and federal regulatory bodies are increasing their scrutiny of cryptocurrency, and new regulations of digital assets are coming.