MINNEAPOLIS -- Experts at Wolters Kluwer Financial Services have mixed predictions concerning the federal regulations financial organizations can expect to have to deal with in 2007.

While it's unlikely a new federal regulation will emerge next year "to turn the financial services industry upside down," experts at the leading provider of compliance and operational risk management solutions to financial organizations, say 2007 could still be a year when recent regulatory changes cause additional oversight for others.

Sue Burt, senior attorney for Wolters Kluwer Financial Services, opined that while much of the industry may get a break from new federal regulations, "some organizations such as mortgage brokers, auto lenders and hedge fund managers may find themselves thrown into the regulatory spotlight."

Indications of this were already apparent this year.

"One example is how some auto lenders were taking the ostrich approach to knowing if their dealers' overage charges resulted in predatory lending. Regulators pulled lenders' heads out of the sand pretty quickly after a series of steep fines and settlements," said Wolters Kluwer Financial Services/PCi's Chief Product Manager Todd Cooper.

Edward Kramer, executive vice president of regulatory programs, said increased oversight of third-party relationships is likely to continue in 2007. To emphasize his point, he cited 2005 HMDA data issued by federal regulators that showed possible discrimination against protected classes for the second consecutive year. This was especially the case, he said, in "outside assessment areas where lenders have a tendency to do more business with mortgage brokers."

Kramer cautioned that, "both lenders and regulators will likely be paying much closer attention to mortgage brokers' pricing policies in 2007."

Among some of the other areas Wolters Kluwers' experts say are on regulators' radar screens are hedge funds and insurance. "While Democrats in both the House and Senate might be more inclined to amend securities laws that would allow the SEC more authority over hedge funds, it's probably not on the top of their to-do list. However, there is also the possibility that one or more states could decide to take on regulation," said Peter Berkery, director of securities information solutions.

As for insurance, Pam Ewing, senior product manager in the company's insurance compliance division observed that with a change of control in the Senate, more support is expected for the pending Optional Federal Charter legislation that would create a new federal regulator responsible for overseeing the insurance. The measure would also impact the McCarran-Ferguson Act enacted in 1945 that permitted states to regulate the insurance business.

Ewing said, "This measure is being driven by the costs that insurers incur, especially in the areas of product innovation and new product creation, resulting from the lack of uniformity among current state regulations. An optional federal charter would represent a significant new development in the regulatory system in this country."

While 2007 is forecasted to bring a mixed bag of regulations for the financial services industry, Wolters Kluwer experts predict all financial organizations will likely have to deal with some common operational and risk management issues.

One of these issues, says Roger Gudobba, senior principal with the company, involves better educating consumers on financial services products. He cited the recent controversy concerning so-called exotic, alternative or nontraditional mortgages, as an example.

Gudobba advised that, "One of the best things a financial organization offering these loans can do is to establish a comprehensive financial literacy program. It not only helps to protect the consumer and the organization from getting into something neither side can afford, but it presents concrete evidence of this to regulators."

With all the changes in federal regulations that financial organizations have to comply with, Wolters Kluwers acknowledged that from a staffing and budgetary standpoint, "it can be challenging for financial institutions to implement these types of programs, as well as other solutions that help them meet regulators' expectations."

One effective way to deal with this, Berkery suggested, is for an organization's compliance department to change the way management looks at compliance.

"Organizations making compliance a part of their corporate culture are faring better financially than those who are not. By blending compliance into operational areas instead of separating it from them, these organizations are making compliance a competitive advantage instead of something that stands in the way of making money," he said. --egbarr06@bellsouth.net

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Wolters Kluwer Financial Experts Say 2007 Holds Oversight Relief for Some, Increased Regulations for Others

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