The CFPB recently released a report on the operational costs of regulatory compliance. The 176-page report is entitled “Understanding the Effects of Certain Deposit Regulations on Financial Institutions’ Operations: Findings on Relative Costs for Systems, Personnel, and Processes at Seven Institutions.” In the report, the CFPB focused on “the costs banks incur to comply with the regulations that the Bureau inherited and that govern consumer deposit-related products and services.” In particular, the CFPB studied compliance costs associated with “checking accounts, traditional savings accounts (e.g., statement/passbook savings), debit cards, and overdraft programs (e.g., overdraft coverage for ATM and debit card transactions).”
The report is based on data obtained from seven banks ranging in asset size from under $1 billion to over $100 billion. The regulations on which the CFPB focused were Regulations DD (implementing the Truth in Savings Act), E (Electronic Fund Transfer Act), P (Gramm-Leach-Bliley Act financial privacy requirements), V (Fair Credit Reporting Act), and relevant sections of the Fair Credit Reporting Act. The CFPB interviewed about 200 employees and executives at the seven participating banks, and the interviews focused on “identifying all of the banks’ operational activities and processes to comply with the regulations in question.”
The study focused on ongoing or recurring operating costs of the regulations, with the CFPB noted that it was only able to capture limited information on the one-time or implementation costs of coming into compliance with the 2009 “opt-in” overdraft regulations. The CFPB found that compliance costs were concentrated in the following business functions: Operations, Information Technology, Human Resources (as it relates to employee training), Compliance and Retail.
For each function at each bank, the report indicates the percentage of total compliance costs that such function accounted for. For each bank, the report also presents total compliance costs as a percentage of total retail deposit operating expenses. The CFPB states in the report that it avoided reporting dollar figures because such figures have “little meaning without comparison to a common denominator” and it would have created a risk of “revealing the identities of the otherwise anonymous participant banks or divulging proprietary information.”
We fail to see how providing dollar amounts would have created such risks. By only using percentages, the CFPB has obscured the magnitude of the dollar costs associated with regulatory compliance. In addition, the CFPB’s percentage estimates do not take into account at least two significant categories of costs: opportunity costs (i.e. profits foregone from business opportunities not pursued because of regulation) and litigation costs. (In explaining its decision not to include opportunity costs, the CFPB observes that while such costs “represent a cost to the bank, such lost profits do not necessarily reflect a loss to society.”)
An important takeaway from the report is that the CFPB is likely to expect financial institutions when commenting on compliance costs associated with proposed rulemakings to follow the techniques and methods used by the Bureau in the study. For example, the CFPB suggests that in addressing costs of a potential new regulation, an institution should “describe the major business functions affected by [the] regulation and trace the effects of the regulation through each function.”
When the CFPB announced its plans in October 2012 to study compliance costs, it stated that it hoped “to become better and smarter regulators” through its research. We certainly hope the study has provided the CFPB with an understanding of bank operations that will be useful when assessing the compliance costs of future rulemaking. However, the CFPB’s statement that “the techniques the Bureau used in the Study will not necessarily work to produce reasonable estimates of the costs of a potential new regulation” does not provide us with great cause for optimism.
Most significantly, while stating in the report that the CFPB “will always strive to improve its ability to avoid or reduce unnecessary compliance costs,” the Bureau makes several other statements that lead us to question how seriously it takes that commitment. More specifically, the CFPB qualifies that commitment with the statement that “in many cases institutions themselves may be better able [than the Bureau] to reduce their [compliance] costs.” According to the CFPB, “the most significant potential savings may come from institutions’ increasing operational efficiencies rather than the Bureau changing [a] regulation.”
As a further qualification, the CFPB states that “where regulatory and business processes, systems, and personnel are interwoven, it is possible that institutions may be able to reduce regulatory costs by streamlining operating costs more broadly. Institutions may find ways to reduce their operating expenses through better technology systems.… To that extent, industry has at least some capacity to reduce its compliance operations costs independent of steps that regulators can take.” Of course, the ability of financial institutions to lower costs does not relieve the CFPB of its obligation to avoid imposing unnecessary compliance costs in the first instance.