By Stuart Grant, EMEA Business Development Manager – Financial Services
If we examine today’s regulatory landscape across Europe, the Middle East and Africa (EMEA), we see a minefield of complexity and requirements that financial organisations must meet.
In the UK specifically, with Basel III and papers such as The Basel Committee on Banking Supervision’s (BCBS) 196 and 222 being recently published, financial organisations in the UK face evermore pressure to meet the demands set by the regulator as we fast approach the 2016 deadline. Looking across Europe’s financial landscape, the friction between regulatory boundaries is clear. Countries such as France and Germany in part favour stricter controls around the minutiae of detail while other EU participants, both regulatory and within the market, believe that the market should manage these aspects themselves and that these details should be the responsibility of the exchanges to define.
An example of the strategic changes taking place within regulatory bodies, in order to meet these new demands in the market, is the splitting of the UK regulatory body from April 2013. What was once the Financial Services Authority (FSA) will now become two regulatory bodies that will carry forward the work on outcomes-based regulation, intensive firm supervision and credible deterrence, entitled the Prudential Regulation Authority (the PRA) and the Financial Conduct Authority (the FCA), according to FSA.gov.uk. This move is an indicator of the renewed focus on the regulatory landscape and firms must ensure their risk management infrastructure is transformed and capable of providing the regulators with the accurate and timely risk data they require.
The steps financial organisations must take to ensure they meet the regulatory challenges vary heavily across the size and nature of firms currently operating in the market:
1. Tier one globally systemic organisations (i.e., the global investment banks).
Tier one banks suffer from decades of mergers and acquisitions which required the integration of technology platforms across varying levels within the new larger organisation. The result is unnecessary layers and outdated technology and risk infrastructure across a global enterprise that is unable to deliver effective risk management programmes and meet regulatory demands.
2. Multinationals / regional financial organisations (i.e., those with significant investment banking capabilities in one or more countries or regions)
Regional organisations have been victims of underinvestment, which has caused a certain degree of culture and infrastructure stagnation. Innovation and next generation of risk analysis often are lagging when compared to the firm’s headquarters.
To combat this, the multinational banks must put an effective incentive practice in place to ensure their people understand why the changes their risk infrastructure systems must make are necessary and why this will benefit them. Providing the opportunity for their people to acquire new skills, employing ‘new blood’ in the organisation and confirming and promoting a top down vision for the organisation with a consistent view of risk management are all essential steps to combating the culture problem that is currently holding back tier two organisations with their battle to meet the ever progressing regulatory demands.
3. Emerging market organisations (i.e., banks in areas of significant growth)
Emerging market organizations until recently have only had to answer to their local regulatory guidelines. Given the increased globalisation of the financial services industry, the regulatory demands of more developed countries will soon be the new standard for all organizations and emerging market banks must adopt. The one benefit that they have compared to their larger tier-one banks is their size. Their simplistic infrastructure will be easier to adopt to new requirements compared to their tier-one competitors who are tangled in years of infrastructure challenges.
The emerging market firms must not make the same mistake as the established and further developed organisations. Historically, these firms have viewed risk management as a cost of doing business and not as a positive advantage and as a result, their risk systems did not receive the investment and level of visibility that is so strongly required to ensure the firm possesses the correct tools to protect themselves and their customers.
Call to Action
Every single organisation across these three categories, despite the differing problems they face, will have to make a significant investment in the near future in order to meet regulators and business demands for risk management. The investment required can be summarised across two key trends:
1. Significant simplification is required across the investment banking industry.
2. Firms must tie in the regulatory requirements with business value strategies.
To ensure predictability and transparency in the future development of the investment banking industry firms must simplify their products and processes in order to create a more factory based approach that will result in more straightforward application of risk management programmes to the day to day running of the business. This involves firms being honest about their core capabilities and moving away from costly, siloed and bespoke practices such as developing custom infrastructure to support their business, except where the organisation has the experience and support to focus on these business areas. In addition, much can be learnt from these ‘bleeding edge’ business environments that should be applied to other areas of the business to move the advancement of on-demand and predictive analysis through the value-chain to the middle and back office.
The regulatory requirements implemented by the financial body must be used by financial organisations to support their business plans. Banks have the opportunity to improve their trading capabilities by providing intelligent tools that build on the regulatory advancements. The costs of meeting the regulatory demands are estimated at ranging from £100 million for multi-regional and strong emerging market firms to half a billion pounds for tier one organisations over the next five years. This huge spend must be tied in with business value in order to improve: business processes; the efficiency of capital in the front office; customer centricity aspect in sales divisions and risk analysis. To avoid the continued losses that firms are currently experiencing, through heavy fines from the regulators and losing potential business due to the reduction in their operational capital, they must consider the two elements of cost and focus on the losses accrued should they dismiss the business value of these regulatory demands.
The regulators are already auditing bank systems as they analyse policy and this process will only become more rigid. As a result of the 2007/2008 banking crisis, there is a hugely increased level of public awareness and any regulatory action that occurs due to poor management is played out publicly in the media. Reputational risk is a huge issue for the financial organisations to consider and the regulatory demands must be met in the face of Government and public investors.
Driving the change to a more simplified industry is the banks themselves and this is due to the realisation that the cost of providing bespoke asset classes and products is uneconomical. Financial organisations must undertake this change to survive and be profitable in the current, and future, market.
As the banks enforce the changes, to the same degree as the regulators, it is apparent that the landscape will become clearer as we approach the upcoming deadlines. In the last decade firms have shied away from long-term strategic developments and now these are starting to creep back into the market and are essential for future success. It is only with a strategy that aligns point solution projects under an Enterprise umbrella project strategy – where innovative technology is re-used across projects to improve operational efficiency and cost – that firms will begin to realise the simplification of their infrastructures and deliver improved insight and on-demand analysis.
The last few years have seen many organisations implement new policy and culture change programs and now we see the move towards active execution of the essential projects that will see the success or failure of the firm played out over the next two to three years. First mover advantage with a strong organisation plan has never been more important.