Credit Union Regulatory Compliance Burden

Small Credit Unions Feeling Squeezed By Compliance Costs

In the world of financial services, modifications to regulatory governance can change rapidly. In fact, some would argue that each new day in the credit union business brings brand new changes that alter the industry from the way things ran at the close of business the prior day. Surrounded by a constant evolution of regulations and legal expectations, credit union leaders are tasked with the enormous responsibility to remain informed and compliant while still paying affectionate attention to the bottom line of the business.

Increasingly strict stipulations from governmental bodies are making one thing very clear: the cost of credit union compliance is an ever-present concern.

In February, Washington D.C. played host to the annual CUNA Governmental Affairs Conference. Throughout the course of five days, keynote speakers from major media outlets and executive leaders from around the country presented opinions, predictions, and fact-based findings. Among the most impactful of presentations was a breakout session entitled CUNA’s Cost of Regulatory Burden Study Results whereby the true financial impact of credit union compliance was revealed, following a major study conducted by Cornerstone Advisors.

According to the Regulatory Burden Study, “the combined effect of increased costs and reduced revenues due to regulation amounted to at least $7.2 billion in financial impact for credit unions” in 2014 alone. I was among the attendees of the CUNA GAC who learned firsthand what the data tells us about the state of the industry.

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It came as no surprise to many that the smallest credit unions suffered the greatest financial impact over recent years. Among study respondents, 34% represented small credit unions, which were defined as those with less than $115 million in assets. This segment reported an astounding 43% increase in credit union compliance cost since 2010. With total industry expense increase reported to have been just 16% from 2010 to 2014 overall, the impact attributable to credit union compliance for small organizations is significant.

Small, mid-sized (those with $115 million to $1 billion in assets), and large (more than $1 billion) in assets all reported the cost of staffing is the biggest component contributing to their regulatory compliance costs. Once again, economies of scale played a major role in the findings, as large credit unions reportedly employ 17% of full-time staff members who are specifically devoted to regulatory activities. On the contrary, 45% of small credit unions’ employees are reportedly allocated to their firms’ compliance initiatives.

The study was indicative of a clear disconnect between legislatures and credit union leaders. The findings of Cornerstone Advisors will allow credit union executives to combat lawmakers’ assumptions that regulation is free by utilizing the evidence provided in the study. Each dollar that financial firms must devote to regulatory requirements is another dollar felt by consumers and the economy as a whole.

Based on respondents’ answers, Cornerstone Advisors estimates approximately $1.1 billion in revenue was lost in 2014 as a result of the cost of credit union compliance cost, but the company cautions that this is likely a very conservative estimate based on the limited data provided. A cumulative calculation including small, mid-size, and large credit unions revealed and overall increase of 39% since 2010. Credit unions caution lawmakers that the imposition of these costs is preventing their companies from deploying better rates, lower fees, and enhanced products to their members. With this information, decision-makers can come together to properly examine the true costs of regulation.

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