My son came home from school the other day and told me that his friend’s kidney had "popped." With great concern and further investigation, I found out that his friend had suffered from appendicitis but had since recovered. Luckily, fifth grade boys and most of the human race can get along fine without an appendix. And, as it turns out, there is another type of appendix people can live without: Appendix Eight—Audit Requirements—in the NACHA Operating Rules. NACHA members recently voted to cut this part out.
But wait—don’t celebrate too soon. The change doesn’t eliminate the requirement to conduct an annual ACH rules compliance audit. Rather, members voted to modify "the Rules to provide financial institutions [FI] and third-party service providers with greater flexibility in conducting annual Rules compliance audits." Specifically, the change—which was effective January 1, 2019—affected the following areas of the NACHA Operating Rules:
- Article One, Subsection 1.2.2 (Audits of Rules Compliance): Consolidates the core audit requirements described within Appendix Eight under the general obligation of participating DFIs and third-party service providers/senders to conduct an audit.
- Appendix Eight (Rule Compliance Audit Requirements): Eliminates the current language contained within Appendix Eight; combines relevant provisions with the general audit obligation required under Article One, Subsection 1.2.2.
FIs and ACH payment processors must still conduct, either internally or outsourced, an annual audit of their compliance with the ACH rules each year. They also must retain adequate proof of completion for no less than six years and may, during that term, need to provide proof to NACHA or a regulator. And they will have to adjust their audit methodologies to ensure that they comply with all relevant rules rather than just rely on the former Appendix Eight checklist.
The new audit process necessitates a risk-based approach, which is a strategy regulators have been encouraging in recent years. With so many emerging technologies, products, and services in the payments industry, FIs and ACH payment processors can no longer take a one-size-fits-all approach for compliance. They also no longer have a single access point to ACH—rather, they must consider many access points when auditing for Rules compliance.
These institutions may not have previously had to take into account other areas that touch payments. For example, the risk-based audit doesn’t explore just the deposit operations department; it analyzes how the whole enterprise interacts with ACH systems. Additionally, it may need to include loan operations, online account opening, person-to-person (P2P) products, investment management, and other new digital channels.
Life without Appendix Eight will be an adjustment, but its removal won’t be fatal. I think ACH participants will recover quickly and be even healthier—embracing the new risk-based compliance model will likely strengthen enterprise risk management and promote increased safety and stability in our payment systems.
By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed