Why Financial Institutions Still Rely on Sample-based Manual Compliance Testing

Despite advancements in technology, most financial institutions today still rely on sample-based manual compliance testing. But is this really the best approach? 

No. And here’s why. 

Let’s take a portfolio of one million loans. To get a 95% confidence interval with a 5% error rate, you would only need to test 383 loans. That means you have 999,617 unknowns that could leave you open to risk. 

What happens when that sample isn’t a true representation of your portfolio? Or, what happens when your sample is different than the regulator’s? As financial institutions continue to prioritize the customer experience, what happens if you have problems you’re unaware of? 

Sample-based testing leaves significant room for non-compliance, yet it’s still the preferred method for two primary reasons: 

1. Financial institutions lack the technology to quickly and accurately test entire portfolios. 

Many institutions today still rely on manual, labor-intensive processes, cobbling together spreadsheets and using SharePoint to manage compliance efforts. For those institutions, testing a few hundred items is much more doable than testing a million. The problem is that this process is ineffective, prone to errors and exposes institutions to greater risk. 

By investing in technology and automation, financial institutions can eliminate manual processes and improve accuracy and efficiency while also reducing costs and regulatory risk. Ultimately, institutions can expand coverage at a lower cost. 

Compliance teams are also more confident in their efforts while reallocating staff and resources to handle high-impact tasks that drive business growth. This is important as compliance expertise remains scarce, especially for smaller markets outside of major cities. With leaner teams, technology can fill in the gaps. 

2. Financial institutions are afraid of what they’ll uncover. 

In a manual world, it’s much easier to correct issues if it’s only a handful. Correcting hundreds of issues can be overwhelming. This is a major concern many institutions have.  

The problem is that when it comes to regulatory compliance, the phrase, “what you don’t know won’t hurt you” doesn’t apply. In fact, what you don’t know can lead to consent orders, reputational damage and even impact your customers’ experience.

Rather than avoiding full-population testing simply because of a fear you’ll uncover more issues than you can handle, having full transparency is more powerful. Financial institutions can review and prioritize issues based on severity and build a culture of compliance. They can also have greater confidence in their portfolios. 

Full-population testing is inevitable and responsible.

The cost and complexity of compliance continues to increase. To keep pace, financial institutions must transform their compliance management efforts with automated full-population testing. 

Check back for our next blog on how the most innovative institutions are testing entire portfolios in minutes to quickly determine compliance with all laws and regulations.

Want to transform your compliance management efforts? 

Schedule a demo today to learn how you can leverage full-population testing.