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Mapping the Road Ahead: Regulators’ Growing Emphasis on Board Governance and Control

As we look towards 2024, a new landscape is emerging in the world of financial regulation. In a bid to strengthen oversight and accountability, regulators are increasingly focusing on board governance and control. This shift is driven by growing concerns over persistent weaknesses at banks and the need for enhanced risk management practices.

New Regulations: A Clearer Roadmap for Board Governance

Regulators are introducing new regulations that clarify the roles and responsibilities of boards in overseeing their organizations’ compliance with laws and regulations. Key provisions include:

  • Oversight, documentation, and reporting processes
  • Escalation procedures
  • Domain skills and experience/expertise (e.g., SEC Cyber Rule, SEC Climate Rule)
  • Ongoing testing and monitoring of controls

These changes aim to promote a culture of accountability and transparency within financial institutions.

Accountability: The Focus Shifts

Regulators are placing greater emphasis on holding boards and management accountable for their actions. This includes:

  • Incentive-based compensation arrangements that reward compliance commitment
  • Disincentives, such as “clawbacks”, for employees engaged in misconduct (e.g., DOJ pilot program, Interagency rule)
  • Evaluating identified areas of risk and compliance weakness

As a result, financial institutions must be prepared to demonstrate their commitment to governance and control.

Supervision of Persistent Weaknesses

The Office of the Comptroller of the Currency (OCC) has introduced new policies and procedures for supervising firms with persistent weaknesses. This includes:

  • Money penalties
  • Remediation plans
  • Growth restrictions, or in certain cases, divestiture and simplification

Regulators will be scrutinizing financial institutions’ ability to address these issues.

Financial Services Supervision and Regulatory Change

The Administration and regulators are exploring potential changes to supervision and regulation. This includes:

  • Enhanced prudential standards (EPS) for banks
  • Deposit insurance reforms
  • Expectations for risk management and governance

Financial institutions must be prepared to adapt to these changes.

Heightened Standards: A New Reality

To stay ahead of the curve, financial institutions must demonstrate and sustain “Heightened Standards” – regardless of size or complexity. This includes:

  • Strengthening risk assessment methodologies
  • Reviewing control testing coverage
  • Clarifying the role of the board

By prioritizing governance and control, financial institutions can mitigate risks and ensure long-term sustainability.

Insights from KPMG

KPMG’s experts in Financial Services Risk, Regulatory Compliance, and Advisory share their insights on the implications of these changes:

“Regulators are increasingly focused on holding boards accountable for governance and control. Financial institutions must be prepared to demonstrate their commitment to compliance.” - Amy S. Matsuo, Principal, U.S. Regulatory Insights & Compliance Transformation Lead at KPMG LLP

“The OCC’s new policies and procedures highlight the importance of addressing persistent weaknesses. Financial institutions must prioritize remediation and sustainability.” - Todd Semanco, Partner, Advisory, FS Regulatory & Compliance Risk at KPMG US

“As regulators continue to issue guidance on enhanced risk management practices, financial institutions must be prepared to adapt and demonstrate their commitment to governance and control.” - Laura Bray, Principal, Advisory, Financial Services Risk, Regulatory Compliance at KPMG US

Stay ahead of the curve by reading more about regulatory activity and issues. Visit our website for updates and perspectives from KPMG experts.

Sources:

  • OCC Policies and Procedures
  • SEC Cyber Rule
  • SEC Climate Rule
  • DOJ Pilot Program
  • Interagency Rule
  • Enhanced Prudential Standards (EPS) for banks
  • Deposit insurance reforms
  • Expectations for risk management and governance

Read more:

  • Financial Services Risk, Regulatory and Compliance
  • Regulatory and compliance transformation