How ‘Fairness’ Helps Compliance

Compliance officers struggle mightily to articulate the right balance between what’s ethical and what’s legal. So when one of the country’s top banking regulators gave a speech earlier this week titled “Fairness and effective compliance management,” it caught my eye.

The regulator in question is Michael Hsu, acting head of the Office of the Comptroller of the Currency, which regulates consumer banks across the United States. Hsu delivered his speech at a meeting of the Consumer Banking Association, and tried to draw a line connecting innovation, modern technology, compliance programs, and a bank’s overall sense of how to treat consumers fairly. 

In short, Hsu argued that banks with a strong sense of fairness — an admittedly intangible thing, rooted the overall ethical culture — will do better at managing the adoption of new technologies, products, and services, because those more ethically aware banks will be better at anticipating potential trouble and innovating their way around it. 

Or, in Hsu’s exact words:

The traditional zero-sum game approach is to trade off compliance with innovation and growth, meaning more of one means less of the other and vice versa. This is shortsighted. Strong and effective compliance risk management should lead to greater freedom and more certainty to innovate and grow. A well-developed sense of fairness can help ensure that compliance risk management practices are effective, especially in areas that are evolving.

It’s an excellent point, and one that applies just as well to any other business sector. Swap the word “ethics” for “fairness” in his above paragraph, and we’d all be nodding our heads in agreement. 

How Ethics Drives Better Growth

Hsu cited bank overdraft fees as an example of what he means. In the 1990s, he said, banks allowed customers to overdraft an account and charged a fee for that privilege — and, importantly, banks expected overdrafts and the ensuing fees to happen infrequently.

Except, Hsu continued, “what began as an accommodation steadily grew into a profit center for some.” According to the Consumer Financial Protection Bureau, banks today reap about $9 billion annually in overdraft fees. Seventy percent of those fees are charged to customers with average account balances of only a few hundred dollars, which of course makes sense: people who don’t have much money are more likely to overdraft an account than people with lots of money. And all the while, overdraft fees kept rising, to an average of about $35.

Well, is that really fair? Is it fair that banks turned overdraft fees into a revenue stream that falls disproportionately on the backs of people who don’t have much money? 

I suspect most people would say no — but we say no only because we have the benefit of hindsight. How many people would have said the same 30 years ago, before we knew that overdraft fees would evolve into such a lucrative, but oppressive, line of business? How many businesses would leave money on the table because that was the fair, ethical thing to do, versus those who would keep taking as much money as possible until regulators imposed a limit?

Or, as Hsu said, “What may seem manageable at first from a compliance risk perspective, can become much more complicated over time. A well-developed internal sense of fairness can help a bank navigate these waters.”

Good banking regulator that he is, Hsu then said that artificial intelligence and other new technologies might create similar risks for banks today. Those new technologies will pave the way for new product offerings, banks will rush after the potential growth — and only much later discover that they have a compliance crisis on their hands that could’ve been avoided.

“The product may be legal, as constructed and marketed. It may technically comply with regulations as they have been understood and applied to date,” he said. “But the product is not fair when over-used by certain consumers. As with overdrafts, having a clear sense of where this fairness line is prior to the development and launch of such a product can help a bank avoid compliance risk issues down the road.”

Fairness for the Rest of Us

So how do Hsu’s observations apply to businesses outside the banking sector? In a few ways, I think.

Let’s say your company has a new opportunity it wants to try. Some new technology has come along, or some new market has opened up, and the business development team has cooked up a few ideas for how to seize that potential for growth. The forecasts look great.

That’s the critical moment. That’s when senior management needs to find the right balance between what’s legal to try and what’s ethical to do. Get that balance wrong, and you’re more likely to encounter compliance trouble further down the road as the consequences of your innovative new growth plan become clear.

Of course, the next question is how compliance officers can get that conversation to happen. In the ideal world, senior executives already have a strong moral compass and a sense of ethics — one that translates into clear limits, where they readily say, “Nope, we’re going to pass on this perfectly legal opportunity because it doesn’t pass our ethical smell test.” In that ideal world the chief compliance officers should also be part of the management team, so you can nudge conversations about new growth toward those lines of inquiry.

Here in the real world, I’m not sure how often those conditions hold true. We see a lucrative new opportunity, work up an execution plan, and then adjust our plans to assure regulatory compliance — but that’s not at all the same as considering ethical implications from the very start. 

Hsu closed his remarks by noting that “compliance has generally been viewed as a means to an end — through compliance with laws and regulations, the goal of fairness in banking can be achieved.”

Today, he said, people should flip the script and use fairness as an input to help guide their compliance risk management programs. 

“By elevating fairness, banks can improve their ability to anticipate and adapt to emerging compliance risk issues,” Hsu continued. “The stronger a bank’s ability to do that, the less it will need to look over its shoulder at its regulators and the more degrees of freedom it will have to innovate and create banking products.”

Words we all should live by, banking sector or otherwise.