The financial industry relies on robust oversight to maintain stability and protect consumers’ Money. For licensed money transmitters, this oversight often comes in the form of regulatory examinations. These examinations are designed to assess a licensee’s adherence to state and federal laws, regulations, and practices that safeguard the financial system. One key outcome of these examinations is the assignment of a FILMS rating.
The Department of Financial Services utilizes the FILMS rating system to evaluate licensed money transmitters. This rating is a crucial indicator of a licensee’s overall health and operational soundness. The acronym FILMS stands for five critical components that are meticulously assessed: Financial condition, Internal controls and auditing, Legal and regulatory compliance, Management, and Systems and technology. The FILMS rating scale ranges from “1” (Strong), representing the highest level of performance and stability, to “5” (Unsatisfactory), indicating significant concerns and weaknesses.
Licensees receiving a FILMS rating of “4” (Marginal) or “5” (Unsatisfactory) face increased regulatory scrutiny. These lower ratings, along with severe violations or deficiencies identified during examinations, can trigger regulatory actions. Such actions may include substantial monetary fines, license suspension, or even license revocation, highlighting the serious implications of a poor FILMS rating for businesses handling money transmission.
Let’s delve deeper into each component of the FILMS rating to understand what examiners evaluate:
Financial Condition: This assessment scrutinizes the money transmitter’s financial health. Examiners analyze the balance sheet, focusing on the composition of assets, particularly permissible investments held to cover outstanding payment obligations. The evaluation also encompasses the level and quality of capital reserves to absorb potential losses or facilitate business growth. Profitability is a key consideration, with examiners reviewing earnings trends and stability. Furthermore, the assessment includes evaluating the licensee’s growth prospects and management’s experience in handling growth, as well as access to additional capital sources, including any support from parent companies or affiliates.
Internal Controls and Auditing: Effective internal controls are vital for safeguarding money and ensuring operational integrity. This FILMS component evaluates the effectiveness of a licensee’s accounting, financial, operational, and systems controls, including the oversight of agents. Examiners assess the extent to which the licensee adheres to established policies and procedures. The independence, frequency, scope, and adequacy of both internal and external audit functions are reviewed, relative to the licensee’s size and risk profile. The severity of any internal control or audit exceptions identified is considered, as is the timeliness and effectiveness of tracking and resolving these exceptions. The adequacy of management information reports is also evaluated, along with the system of controls’ ability to adapt to changes in the licensee’s business plan.
Legal and Regulatory Compliance: Operating within the bounds of applicable laws and regulations is paramount for money transmitters. This evaluation centers on the licensee’s adherence to state and federal laws and regulations, including any supervisory follow-up actions. The effectiveness of the licensee’s written compliance program, including its policies and procedures, is a key focus. Examiners also assess the licensee’s ability to submit accurate regulatory reports in a timely manner. Critically, management’s capacity to identify and rectify compliance issues promptly is also evaluated.
Management: Sound management is the cornerstone of any successful and responsible money transmission business. The management component of the FILMS rating assesses the overall performance of the licensee and the capability of the governing board and management in their respective roles. Examiners evaluate their ability to identify, measure, and monitor the risks associated with the licensee’s activities. Management depth and succession planning are considered, alongside the responsiveness of management to recommendations from auditors and supervisory authorities.
Systems and Technology: In today’s digital age, robust systems and technology are crucial for secure and efficient money transmission. This evaluation focuses on four critical components of IT: IT Audit, Management, Development and Acquisitions, and Support and Delivery. IT Audit assesses the quality of the entire IT auditing process, both internal and external, including risk assessment and the auditor’s ability to effectively identify, monitor, and test internal controls over information systems. The Management aspect evaluates how effectively management monitors and controls IT-related risks, including resource allocation and disaster recovery/business continuity planning. Development and Acquisitions addresses the adequacy of the licensee’s systems development methodology and risk management practices for IT acquisitions and development. Finally, Support and Delivery measures the licensee’s ability to provide reliable, secure, and high-quality information systems services efficiently, whether in-house or through service providers.
In conclusion, the FILMS rating system provides a comprehensive framework for evaluating the safety and soundness of money transmitters. By focusing on these five critical components – Financial condition, Internal controls and auditing, Legal and regulatory compliance, Management, and Systems and technology – regulators can effectively assess the risks associated with money transmission and ensure the stability of the financial system and the protection of consumer money. A strong FILMS rating signifies a well-managed and compliant money transmitter, while lower ratings signal potential risks that require regulatory attention and corrective action.
