What is financial services regulation?
Financial services regulation involves establishing and enforcing rules and standards that govern financial institutions, markets, and transactions. Governments or regulatory bodies create these regulations to ensure financial stability, protect consumers, and maintain market integrity.
Financial services regulation typically covers areas like banking, securities, insurance, and investment, aiming to prevent fraud, manage risks, and ensure transparency in the financial system.
For FP&A teams, these regulations directly impact how you manage financial planning, make strategic decisions, and report financial performance.
Why is financial services regulation so important for finance leaders?
Financial services regulation governs how finance and FP&A leaders manage company finances, make strategic decisions, and ensure compliance with legal standards. These regulations directly impact risk management, financial reporting, forecasting, and budgeting.
As an FP&A leader, you must follow these regulations to avoid legal risks, prevent financial penalties, and maintain your company’s reputation, while also protecting your company’s financial health and driving growth.
Regulations help enforce transparency and accountability in financial reporting by following standardized accounting practices and clear disclosure requirements. This transparency helps build trust with investors, regulatory bodies, and stakeholders and gives them the information they need for sound decision-making.
By keeping financial regulations in mind while developing financial strategies, finance teams can make decisions that are legally sound, strategically aligned, and beneficial to the company’s overall objectives.
Why are financial regulators important?
Financial regulators help create and uphold regulations that ensure fairness in the finance market. They can also help:
- Monitor the financial market to prevent fraudulent activities
- Conduct investigations and bring legal actions against violators
- Protect consumers and investors from fraud, misconduct, and abuse
- Create, enforce, and uphold laws and regulations related to financial services and products
- Ensure that financial institutions operate in a transparent and accountable manner
What companies do state financial regulators oversee?
State financial regulators oversee finance companies within state lines. They’re responsible for overseeing state-chartered banks and nonbank financial services providers, including mortgage lenders. They also oversee insurance companies, credit unions, and money services businesses.
How are state financial regulators and federal financial regulators different?
While state and federal financial regulators both ensure fairness in the financial markets, they differ in jurisdiction, regulation scope, and the regulatory agencies they oversee.
State financial regulators are responsible for chartering, licensing, and supervising state-chartered banks and non-bank financial services. They oversee institutions that operate within state lines. State regulators ensure financial institutions operate safely and soundly and that consumer protection laws are followed. They’re required to support the economic health of their local communities, which is done by encouraging financial institutions to provide loans to small businesses and contribute to local development projects.
Federal regulators oversee financial institutions that operate across state lines. Federal regulators oversee national banks, federally chartered credit unions, large financial institutions, and foreign banks. Federal agencies include the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.
Key financial regulators in the U.S.
The United States has a number of key financial regulators. Let’s take a look at a few:
Federal Reserve Board
The Federal Reserve Board (FRB) is run by seven members, or "governors," who are nominated by the President of the United States and confirmed in their positions by the U.S. Senate. They are responsible for influencing money, liquidity, and overall credit conditions.
The FRB implements monetary policy primarily through open market operations, which involve the purchase and sale of U.S. Treasury securities and federal agency securities. These operations help control the money supply and influence interest rates.
The Board also oversees the U.S. commercial banking sector. While most national banks are required to be members of the Federal Reserve System, they are primarily regulated by the Office of the Comptroller of the Currency, not the Federal Reserve Board.
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) maintains stability and public confidence in the nation's financial system. It’s an independent body created by Congress that insures deposits, examines and supervises financial institutions for safety, soundness, and consumer protection, resolves large and complex financial institutions, and manages receiverships.
FDIC uses premiums banks and savings associations pay for deposit insurance coverage to fund its activities.
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency (OCC) is an independent bureau of the U.S. Department of Treasury that regulates and supervises all national banks, federal savings associations, and agencies of foreign banks. OCC issues banking rules and provides legal interpretations and guidance for banks.
It also evaluates applications for new bank charters or branches and from foreign banks wishing to operate in the U.S.
Commodity Futures Trading Commission
Commodity Futures Trading Commission (CFTC) is an independent authority that regulates commodity futures and options and other related derivatives markets. The commission protects people from market manipulation and investigates fraud and other abusive practices.
The CFTC is made up of five commissioners appointed by the president (with the advice and consent of the Senate) and each commissioner serves staggered five-year terms.
Office of Thrift Supervision
The Office of Thrift Supervision (OTS) is responsible for examining, supervising, and regulating federal savings associations insured by the FDIC. OTS examines, supervises, and regulates state-chartered savings associations insured by the FDIC and provides for the registration, examination, and regulation of savings and loan holding companies (SLHCs) and other affiliates.
OTS merged with the Office of the Comptroller of the Currency on July 21, 2011.
Financial Industry Regulatory Authority
Financial Industry Regulatory Authority (FINRA) is a not-for-profit self-regulatory organization that oversees U.S. broker-dealers. FINRA uses AI and machine learning technologies to monitor the market and support investors, regulators, policymakers, and other stakeholders.
FINRA trains financial services professionals, licenses and tests agents, and oversees the mediation and arbitration processes for disputes between customers and brokers.
Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) has authority over every aspect of the securities industry. The commission is responsible for protecting investors and maintaining a fair and orderly financial market.
The Securities Exchange Act of 1934 established the SEC, which operates independently of the U.S. government.
State financial regulators
State financial regulators oversee financial institutions and activities within their specific state. These regulators ensure that state-chartered banks, credit unions, and other financial entities comply with state laws. Their role is crucial in maintaining the integrity and stability of the financial system at the state level.
State regulators also protect consumers by enforcing rules that prevent fraudulent practices. They conduct regular examinations and audits of financial institutions to ensure compliance with state-specific regulations. This oversight helps maintain public trust and safeguards the financial well-being of residents.
How to follow federal and state financial regulations
Compliance helps protect your business from legal penalties and damage to its reputation while promoting transparency and trust with stakeholders. Here are a few ways to ensure compliance:
1. Be aware of all financial requirements for your industry
Start by identifying the specific regulations that apply to your industry. Different sectors have unique financial requirements that impact how you manage budgets, forecasts, reporting, and other financial duties. Regularly reviewing updates to these regulations ensures that your financial strategies remain compliant and helps you avoid penalties that could disrupt business operations.
Practical steps include working closely with your legal teams, subscribing to industry updates with resources from the SEC, state financial regulatory bodies, or industry-specific newsletters, and providing ongoing training and certification programs for your team.
2. Document everything
Maintain detailed records of all financial transactions, decisions, and processes. These records provide a clear audit trail, making it easier to verify your organization is aligned with any governing regulations.
Detailed records also allow you to track how regulatory decisions impact your organization’s financial performance over time. This can help you refine your compliance approach, optimize resource allocation, and make the right decisions.
3. Use compliant financial management tools
FP&A teams can use financial management tools to help process and report all financial data according to the financial regulations.
Compliant finance software can streamline financial operations for FP&A leaders by providing built-in checks and controls that align with legal requirements. This lowers the risk of making manual errors that could lead to regulatory issues.
4. Conduct regular internal audits and inspections
Regular internal audits and inspections help locate potential regulatory issues early, allowing your team to fix them before they become bigger problems.
To conduct an audit, clearly define what you need to review—whether it's financial records, operational procedures, or compliance with specific regulations. Use auditing tools such as compliance management software to track and document your findings. Depending on your business’s size and complexity, consider outsourcing the audit to a third-party firm for an objective perspective.
Conduct internal audits quarterly or annually, focusing on high-risk areas like financial reporting, data security, and industry-specific regulations. By consistently reviewing records and procedures, leaders ensure that every action aligns with regulatory requirements and company policies.
5. Provide compliance training to employees
Regular compliance training helps everyone understand the rules and how they apply to their daily work. This helps prevent mistakes that could lead to costly regulatory violations, like incorrect tax filings, mishandling customer data, or failing to adhere to anti-money laundering (AML) requirements.
Schedule regular training sessions and updates. As regulations evolve, keep your team informed of any changes. This proactive approach ensures that your team remains compliant and prepared to handle new regulatory challenges. Plus, well-informed team members contribute to a smoother, more reliable financial process.
6. Collaborate with legal and compliance teams
Your organization’s legal teams can identify potential risks and offer solutions that keep financial operations within the bounds of the law.
Establish regular communication or meetings between your FP&A team and your organization’s legal department. Frequent discussions help ensure everyone stays updated on regulatory changes and understands how to apply them in practice.
7. Prepare for external financial audits
External financial audits will check whether your financial practices follow federal and state regulations. Audits include IRS tax audits, SEC compliance audits, and industry-specific audits such as those required by the Sarbanes-Oxley Act. If you fail these audits, you could face repercussions like hefty fines, interest on unpaid taxes, loss of investor confidence, increased future audit scrutiny, or even legal action.
FP&A leaders should ensure that all financial processes are always audit-ready. Regularly review financial records and processes to make sure they meet regulatory standards. Well-maintained documentation also makes it easier for external auditors to confirm compliance, which reduces the chances of any issues arising.
Streamline financial service regulation for your business
Implementing a clear and structured approach to compliance ensures your financial operations remain efficient, legally sound, and aligned with the company’s objectives.
Looking to simplify your financial management processes and stay ahead of financial regulations?
Schedule a free demo with Cube.
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