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The New Face of Regulatory Response: Opportunity

The New Face of Regulatory Response: Opportunity
March 11, 2016

The subject of financial services regulatory compliance is likely to elicit a number of responses ranging from yawning to fear.  It is very unlikely this subject will generate enthusiastic support for new opportunities, but the time has come for this to change. 

According to CEB research 57% of survey respondents indicated that pressure to address regulatory issues has increased significantly.  Forty three percent believe that pressure has increased somewhat. There is no financial services executive who believes the pressure has lessened.  Yet, responding to requirements is very challenging and financial services organizations struggle to find the right balance between human capital and technology investment.

The operational challenges related to enterprise risk and compliance solutions have become more complex. These and other challenges are affecting financial institutions’ top and bottom lines.

  • The inability to link compliance regulations and policy settings to decision support workflows and systems
  • The need for frequent stress tests and valuations for capital, and profit and loss.
  • Complex regulatory reports for multiple jurisdictions
  • Need to consolidate know-your-customer (KYC), anti-money laundering (AML), and anti-fraud operations and technology across silos and regions.

Due to the escalation in pressure, some institutions respond with quick fixes, work-arounds, and band-aids, believing that just “getting it done” permits them to get back to business.  However, the actions are not repeatable for future response requirements, which, fundamentally increases costs and adds complexity.  CEB TowerGroup research shows that the more common reaction to regulatory requirements is to add significantly more controls and responses than is actually necessary.  On the surface this may appear to be the proper path – potentially it keeps the institution away from fines.  However, in the long run the impact is to hamper innovation and reduce both financial and human capital available for business value and growth.

An often quoted phrase is: “Nothing is certain but death and taxes.”  Without much of a stretch, it could be added: “….and regulation in financial services.” Given this certainty, institutions must alter their view of regulatory response as an evil necessity and turn it into a business competency, on par with digital capabilities, multi-channel communication, and straight through processing. This may appear counter-intuitive, but focusing on the business case surrounding effective and agile regulatory response versus just the compliance demands can significantly alter how institutions view investment in regulatory technology solutions. More importantly, it can change the actual results and corporate capabilities.

To address the operational problems identified above, an enterprise layer including data integration, risk modeling, and analytics and reporting is critical.  Of particular importance is the configurability of the technology so the responses are repeatable which will become most specifically important for global organizations feeling the pressure from a lattice work of geographic focused requirements.

Over time, one of the inherent problems that on-going regulatory response generates is layer upon layer of controls, many of which are no longer visible due to things such as the passage of time. Without visibility into all regulatory controls, old, layered controls may not be necessary or may even be in conflict with newer controls.  An analytics capability, coupled with data integration rigor is a significant step toward assuring this does not happen.

IT departments are stretched beyond reason in many cases.  Very little happens in financial services today that does not have a technology component.  Getting into the IT queue, waiting for resources to free up, is fairly common place.  However, the urgency of escalating regulatory response might well suggest that waiting in line for help with a regulatory technology solution is a recipe for disaster, or, at a minimum, an unwanted fine.  CEB TowerGroup analysis indicates financial institutions that are able to successfully determine where to allocate internal IT resources and where to access external IT resources for development and deployment are the organizations that will be able to advance their competitive position in the market.  Assuring that deep, and specific, knowledge and skills are brought to regulatory technology initiatives is imperative and institutions must be realistic in their assessments or risk brand and capital.

Rethinking how your organization approaches regulatory compliance can alter business outcomes on several levels.  Not only will regulatory response be more agile, precise, and repeatable, but human and financial resources dedicated to manual and redundant regulatory responses can be reallocated to innovation projects that will drive growth and profit.  That is a win-win.

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