Disclosures: Think what, why and where to stay a step ahead of regulation

In theory, customer-facing disclosures are simple: Tell your customers what is required by law, regulation or rule, and make certain your processes match your disclosures. But as baseball legend and expounder of everyday wisdom Yogi Berra once said, “In theory, there is no difference between theory and practice – in practice, there is.”

Many in the financial services industry know this all too well.

When the first disclosures were mandated as part of the Federal Reserve Act in 1918, there was a single U.S. banking regulator with a handful of regulations applied to a smattering of products and customer communications changes. Today, financial institutions have more than a dozen regulators, hundreds of regulations and rules, a plethora of products, and more customer communication channels than could be imagined a century ago, including television, ATM screens, internet, mobile/SMS and social media. In practice, managing disclosures has not been an easy task for several decades.

Why do disclosures matter now more than ever?

It all starts with the customer. Clear and accurate disclosures matter to customers. And with the creation of the Consumer Financial Protection Bureau (CFPB) just over a decade ago, confused and angry customers have more power than ever to hold financial services firms accountable.

Since its creation post-financial crisis, the CFPB has fined institutions when the agency determines a business practice has wrongly impacted consumers. While these large fines are unfortunate, they seem to be the most effective way to drive operational changes, some argue. Since that 2011 launch, the CFPB has levied more than $20 billion in consumer relief and fines, and the bulk of those charges were linked to disclosure shortcomings.

From 2016-2021, the CFPB was relatively quiet, with consumer relief actions totaling $800 million or less per year. New leadership since then has brought greater actions in total. In 2022, for example, the CFPB’s consumer relief actions added up to $2.4 billion – triple the cost of any of the previous six years. Our industry should expect this level of enforcement action to continue.

Often a regulatory fine is a small fraction of the overall cost to the financial institution. In one instance, a chief operations officer at a $40 billion-plus bank stated the true cost of remedying their disclosure issue after the fact was around three times the cost of the regulatory fine. The bank had spent roughly an equal amount to investigate and defend its actions, using internal operational, compliance and legal resources and outside counsel. It also spent an equal amount to remediate its previous actions, according to news reports covering this situation. Most importantly, the reputational damage was significant, although not quantified.

As an industry, what should we do?

Financial services companies need to get a complete handle on the What, Why and Where of disclosures. It’s a simple statement; a much harder ask to put into action. Let’s break down each step.

1. WHAT are you communicating in your actual disclosures? Identify all disclosure instances and eliminate unnecessary variations. You don’t need 10 unique versions of an e-sign agreement. Unnecessary variations increase legal, operational and reputation risk. Identifying and eliminating unnecessary disclosure variations is known as rationalizing disclosures. Through rationalization, roughly expect to eliminate two unnecessary disclosure versions for every one you keep.

2. WHY are you communicating this information to your customers? Link all perceived disclosures to obligations required by laws, regulations and rules (LRRs). If you are unable to link text excerpts to LRRs then they are probably not disclosures. They are most likely disclaimers included to proactively reduce legal risk.

3. WHERE are you communicating this to customers? Identify all documents, messages, scripts, etc. containing customer-facing disclosures. Logging disclosures to communications is the final step in establishing ongoing traceability.

These three steps are required to create end-to-end control of your disclosure processes. Like the way regulators expect LRR obligations to be mapped to processes, we should expect that in the not-too-distant future, regulators will expect LRR obligations to be mapped to disclosures.

Unfortunately, many financial institutions do not proactively address the root causes of their disclosure failures until after major fines are assessed. The reality is that customers and shareholders are both damaged in this situation – years of a potentially poor customer experience capped off by needless destruction of shareholder or reputational value by regulatory fines and unnecessary operational costs.

The complexity of the disclosure environment continues to increase and so does the likelihood of being fined for non-compliance. As another example of the ever-evolving nature of disclosures, the U.S. draws closer to implementing ESG (Environmental, Social and Governance) disclosures. That’s new territory for many organizations, which will likely result in more potential fines for non-compliant financial services companies.

A final word

Rather than reactively addressing their current disclosure environment after fines have been levied, companies should invest a fraction of the expected fines to create a world-class disclosure environment based on rationalization and traceability.

Remember, if you don’t improve your disclosure environment, it’s not a matter of “if” you’ll be fined, but “when” you’ll be fined. And that’s not theory.

Brent Bahnub is founder and CEO of Apogee Process Improvement.