Legislating Intelligence

Looked at simplistically, bank compliance regulation is an attempt to legislate intelligence. After all, most compliance legislation is generated by mistakes, mistakes made by banks and mistakes made by customers. What we call "compliance" regulation is intended to prevent those mistakes and their damaging results. The theory was that providing information would make smarter consumers.

The purpose of Regulation Z-one of the first attempts to legislate intelligence- was to fully disclose the cost of credit and help the customer understand contractual provisions in the note. To help the customer understand the costs, we have calculations such as the Annual Percentage Rate. To help the customer understand the terms of the credit, we have additional disclosures about the presence or absence of certain contractual features.

On the deposit side, we now have Regulation DD. Truth in Savings, designed to help the customer understand the features and return on different deposit accounts and choose the "best" one for their purposes.

Compliance also features legislated procedures for correcting problems when something goes wrong. We have Fair Credit Billing for correcting errors on credit card bills, and error correction procedures for electronic funds transfers.

How successful is all of this? The fact that Regulation Z tops the list of common violations and Regulation DD is rapidly rising means that those whose job it is aren't always getting it right. If bank staff can't master what is and what isn't a finance charge, how can we expect the customer to read and understand the disclosures we give them?

The problem with these well-meant ideas is how to make them work. That, after all, is the job of a compliance manager. We often measure the success or failures of our compliance programs by the presence or absence of mistakes.

But is the absence of mistakes really what compliance should be about? After all, the ultimate goal of compliance legislation is for the consumer not to make mistakes so that the consumer gets what s/he wants.

What then can we do to make all this work and thereby avoid more regulatory burden?

We all know that the intelligence needed to understand a credit or deposit transaction cannot be legislated. First of all, not all customers actually read the disclosures before signing on the dotted line. (Yes, the editor does read hers, even though it causes serious delays at closing because no one actually schedules the time for reading documents!)

Also, many consumers (like many bankers) find the disclosures confusing. The required compliance disclosures couldn't be taught in most high schools or even college. So, we are not likely to achieve the goals of compliance legislation by assuming that someday consumers will understand it. Homebuyers may take courses in how to do home repairs, but they are not likely to take a course on Regulation Z! If they do read their disclosures, they are likely to have a lot of questions, such as "just what is an APY?"

Clearly, we are going to have to make this work some other way. I think the answer lies in good customer service. Consider the principles that underlay compliance legislation. The legislation is simply intended to level the playing field for the consumer so that the consumer can get a fair deal.

To carry out the spirit of compliance legislation, play fair with the customer. Understand their point of view. Do what you can to make sure that customers understand their transaction. Make sure they are getting what they want.

This gives new and different meanings to terms such as "fair" lending and "know your customer." Forget the regulatory definitions (momentarily) and look to the job that needs to be done. Be fair with customers. Know them well enough to help them get what they want and need. By providing this kind of quality service, you and your bank will be contributing to two important goals. First, you will be giving excellent service to customers. Second, you will be helping to prevent more compliance legislation.

That could be an important contribution to the future of banking.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 12, 7/96