Industry regulation resembles an exercise in archaeology or geology. Not only are many products and activities regulated, there is also layer upon layer of regulatory documents. Some layers can be more significant than others. And others can be mistaken for, or misrepresented as, something they are not.
Digging into the layers
Some layers are laws. When Congress passes an act and the President signs it, the resulting law contains provisions that require or prohibit certain actions—or set limits. Once something becomes a law, it defines the borders of what banks can or cannot do.
Laws tend to be vast—and often vague—in addressing specific problems or activities.
For example, it is one thing to require disclosure of finance charges. It is quite another to figure out precisely what constitutes a finance charge. It is one thing to require reporting of suspicious activity. It is quite another to figure out what constitutes suspicious activity and how the report should be prepared and filed.
This is where regulations come in.
Regulations are supposed to add the detail that is lacking in the laws. Regulations do add details—lots of details. Just compare the length of a regulation to the length of the law. CRA makes a really good example for this. A relatively basic statement in the law has turned into pages and pages of regulation.
But if regulations answered all the questions, we wouldn’t have interpretations and Official Staff Commentary. Commentaries explain the regulation, which explains the law. All of these documents carry the weight of the law. Even commentaries or interpretations are turned to as legal guidance by courts. So we basically have to treat all three levels as hard law.
But what about “guidance”?
Is it a guide or is a regulation?
Agencies are fond of issuing guidance rather than a new regulations. In issuing guidance, the agencies claim they are doing the industry a favor.
Guidance provides clarity. Guidance provides a heads-up on how the agency will apply law and regulations. Guidance should be a good thing, right? It should help.
But it isn’t a law or regulation, it’s merely “guidance.”
In the non-regulatory world, guidance is considered helpful. And it is take-it-or-leave-it. Guidance is really just advice—helpful advice. It falls into the realm of “Here’s a good way to do this.”
So, what about regulatory guidance? Is it really just helpful advice?
What happens if you choose to do something different, i.e., not follow the regulator’s advice?
Choosing not to follow regulatory “guidance” usually has disastrous consequences. That’s because it isn’t really just helpful advice. It is much more.
It is the law without actually being the law. Ignore it at your peril.
Regulatory guidance falls into two categories.
One is “this is what we think the law means.”
Guidance of this type is a way for the regulatory agency to address an issue without going through the full process of issuing a formal interpretation. Guidance of this type can be useful. For example, it does answer questions and it does provide some additional clarity.
But if you think of it as merely advice, beware. When a regulatory agency issues this type of guidance, the agency is telling you that this is its answer and that’s all there is to it.
The second type of guidance provides a warning on how the agency will enforce a regulation.
The regulatory agency guidance on enforcement of Regulations B and Z was issued decades ago. Both guidance documents provide information about how the agencies will enforce the regulations. The guidance on Regulation Z enforcement is particularly helpful because it establishes formulas for calculation of restitution. If a bank self-identifies a disclosure error, it can follow the enforcement guidance to resolve the problem.
Whether the guidance is interpretive, or states how an agency will approach enforcement, guidance is ignored at the peril of the ignorer. Guidance is essentially a statement from the regulator that tells you how the agency understands the meaning of the law and regulation and what they will do when they encounter a bank that has followed a different route.
Guidance on how an agency plans to enforce a law is really a promise that the examiner will write up the bank that does anything differently. It isn’t advice, it is an early warning.
Ignore the warning and face enforcement.
When regulators use it, “guidance” may sound nice, but it really means “This is an order.” So when guidance is issued, the prudent manager will pay close attention. The regulator publishing guidance is serious.
Why regulators keep doing it this way
Why not simply issue or revise a regulation instead of issuing guidance?
It is much easier to issue guidance. Issuing or revising a regulation requires going through the public notice and comment process. It also requires a formal decision from the agency head. Usually, the agencies are pretty good about giving the industry an opportunity to comment on guidance. But doing so isn’t necessary.
So, when agencies issue guidance—or a bulletin—pay attention.
Ignoring it is not a good idea. No matter how blithely the issuer states that it is merely guidance, experience tells us that it carries as much weight as the law itself.
Not following guidance will be considered a violation.
And if it can’t be treated as a violation, it will be used to lower the assessment of the bank’s risk management.
And there goes the bank’s rating.