The word “exam” tends to trigger anxiety, whether it comes from a school, a doctor, or a financial regulator.
In financial services, however, regulatory examinations are an unavoidable part of operating in a highly scrutinised environment, said AscentAI.
While they can feel intrusive, the reality is that thoughtful preparation can significantly reduce both disruption and risk. Firms that understand what regulators are likely to focus on are far better placed to demonstrate strong governance and sound decision-making when examiners arrive.
At their core, regulatory exams are about risk. Financial regulation exists to protect investors, ensure market integrity, and limit systemic harm. Examiners are typically trying to understand how a firm identifies, manages, and allocates risk, and whether its activities create unacceptable exposure for clients or the wider market. Regulators want evidence that firms act as honest brokers, careful fiduciaries, and responsible market participants. While most firms believe they meet these standards, exams test whether those beliefs are supported by practice, controls, and documentation.
One of the most common starting points for examiners is revenue. Business lines or products that generate the most income are often examined first, as outsized revenue can be a signal of outsized risk-taking. High-volume activities may also attract scrutiny even if individual transactions appear low risk, as weak controls, rushed processes, or poor record-keeping tend to emerge where scale is prioritised over oversight. Firms should therefore understand exactly where their profits come from and be prepared to explain how risk is controlled in those areas.
Regulatory focus is also shaped by broader social, political, and market trends. Exam priorities evolve with changes in government, emerging technologies, and financial crises. Importantly, regulators rarely keep these priorities secret. Guidance documents, speeches, and public statements often provide clear indications of where attention will be directed next. Firms that monitor these signals and build proactive responses are far less likely to be caught off guard during an exam.
Past regulatory issues are another predictable area of attention. If a firm has previously faced disciplinary action or audit findings, examiners will almost certainly revisit those areas to assess whether meaningful improvements have been made. Regular internal reviews of historical issues, remedial actions, and current controls can help firms speak confidently about lessons learned. Demonstrating openness, accountability, and improvement often strengthens credibility, while dismissing prior findings can quickly undermine trust.
Changes within the business since the last exam also matter. New products, abandoned strategies, rapid growth, or unexpected failures all raise questions for regulators. Examiners will want to understand why these changes occurred, what risks they introduced or reduced, and how compliance considerations were addressed. Firms should be ready to explain both successes and setbacks with clarity and evidence.
Finally, enforcement activity and anticipated rulemaking offer valuable insight into future exam priorities. Recent disciplinary actions often highlight exactly what regulators consider unacceptable. Staying informed allows firms to identify weaknesses before they become findings. Similarly, forthcoming rules can influence what examiners focus on today, making regulatory horizon-scanning an essential part of exam preparation.
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