Whether it comes from a doctor, a teacher, or a financial regulator, the word “exam” rarely inspires confidence. In financial services, however, regulatory exams are an unavoidable reality.
They represent a moment when a firm’s controls, culture, and risk management practices are placed under intense scrutiny, said AscentAI.
While exams can feel uncomfortable, thorough preparation can significantly reduce disruption and help firms engage with regulators more confidently and constructively.
At their core, regulatory exams are designed to assess risk. Financial regulation exists to limit harm to investors, issuers, markets, and the wider financial system. Examiners are therefore focused on understanding how a firm identifies risk, where it allocates risk, and whether it introduces new or unmanaged risks into the market. Regulators want assurance that firms act as responsible fiduciaries, honest intermediaries, and reliable market participants. While most firms would answer “yes” to these expectations, the challenge lies in demonstrating this clearly and consistently during an exam.
One of the first areas examiners typically explore is how a firm makes its money. Revenue concentration often signals where risk may be most acute. Highly profitable product lines or services naturally attract attention, particularly if they involve complex structures, client funds, or large transaction volumes. Even low-risk offerings can raise concerns if they operate at scale, where weak record-keeping or process shortcuts may emerge. Firms should therefore be prepared to explain not just what generates revenue, but how risks are controlled within those activities.
Regulatory focus is also shaped by broader social, political, and market trends. Exam priorities evolve alongside changes in government, economic cycles, and financial innovation. Importantly, regulators are rarely subtle about these shifts. Speeches by senior officials, policy statements, and published exam priorities provide valuable insight into emerging areas of concern. Firms that actively monitor this guidance and map it against their own operations are far less likely to be caught off guard.
Past regulatory issues are another critical reference point during exams. If a firm has previously faced disciplinary action or identified compliance weaknesses, examiners will almost certainly revisit those areas. Regulators look for evidence that deficiencies were taken seriously, addressed thoroughly, and embedded into long-term improvements. Firms that can speak openly about past challenges, lessons learned, and remediation efforts often build credibility, while dismissive attitudes toward prior findings can quickly undermine trust.
Change is another powerful trigger for regulatory interest. Business lines that were not examined previously, or that did not exist at the time, are likely to attract attention if they have since grown in size, revenue, or risk exposure. This applies equally to successful expansions and failed initiatives. Firms should be ready to explain why strategies shifted, what risks were identified, and how compliance considerations informed those decisions.
Finally, enforcement actions and upcoming rulemaking offer valuable clues about regulatory intent. Recent disciplinary cases often highlight systemic weaknesses that regulators are actively targeting. Treating these actions as early warnings allows firms to address gaps before they become exam findings. Similarly, proposed rules can influence what examiners prioritise today, making regulatory intelligence an essential part of exam readiness.
Copyright © 2025 RegTech Analyst
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