Finding Advantage in the New Normal

Finding Advantage in the New Normal

An Economist Intelligence Unit research programme

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Introduction

For financial services firms, a complex, highly regulated global marketplace is now the “new normal”. The challenges inherent in this new normal present a clear opportunity for companies to improve performance while contributing to the bottom line and enhancing the client experience. By integrating compliance and regulatory requirements, companies are achieving operational efficiencies, refashioning their corporate cultures and developing and refining best practices.

Many firms are starting to view regulatory compliance as a catalyst for business transformation. For individual firms and for the financial services industry as a whole, regulatory demands can help drive the development of more robust, more unified, more responsive and more flexible operations. Regulatory compliance can actually become a springboard for making needed improvements to business models.

Companies of all sizes are embracing regulation as an avenue to achieve operational excellence. Large sell-side firms that historically insource technology and operations are now turning to third parties for assistance, while smaller firms are seeking to benefit from the increasing number of shared services.

To understand just how operational teams are contributing business value to their companies in these highly regulated times, the Economist Intelligence Unit (EIU) conducted a survey, sponsored by Broadridge, of 414 financial services executives, 40% of whom hold C-level positions.

Some key takeaways from the research include:

• More than half of financial services executives surveyed say that expanding into new markets is the single biggest overarching business orientation, with many citing regulatory compliance as the biggest hurdle to organizational success.

• Regulatory compliance is heavily dependent on technology, which—despite becoming more affordable—still requires companies to make the necessary investments.

• A robust, integrated and centralized system that accommodates varied regulatory demands from multiple jurisdictions can form the basis for highly productive and efficient operations.

• Development of automated operational processes that integrate risk management, audit trails and compliance functions is cited by nearly half of survey respondents as the best way to respond to more intense and detailed regulatory and governance requirements.

• Businesses would be wise to foster a culture of compliance, which requires hiring specialists and educating the entire employee base.

FINDING ADVANTAGE IN THE NEW NORMAL

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New Markets and New RulesMore than half (57%) of executives surveyed by the EIU say that expanding into new markets is their single biggest business orientation. The majority of respondents also cite more intense regulation and governance as the most important challenge to organizational success. Put regulatory compliance and new markets together and the challenge is compounded. (See Chart 1 and Chart 2.)

Chart 1. What is your company’s overarching business orientation?

Chart 2. Which of the following trends presents the single most important challenge to the success of your organisation?

Each additional market presents many new hurdles. Perhaps none are as challenging or as significant for operations teams as regulatory compliance. Poor operations can attract more regulatory scrutiny.

In turn, more regulatory attention can result in damaging publicity and customer attrition, not to mention massive amounts of institutional time and resources spent clearing any issues.


Consolidating existing markets

Status quo

Expanding into new markets

0% 20% 40% 60% 80% 100%

Changes in market or industry structure

Other (please specify)

Growing globalization

Don’t know/not applicable

More intense regulation and governance

Technology advances

0% 20% 40% 60% 80% 100%

“There is no way you can compromise,” says Lars Seier Christensen, CEO of Copenhagen-based Saxo Bank, a financial services firm focusing on online trading, with operations in 25 countries. “When allocating resources,” he says, “meeting regulatory requirements is always top of the list; if you don’t meet those, you are potentially out of business.”

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Most brokerage firms and money managers with international reach appear to have accepted the realities of a more regulated global marketplace and are coming to grips with multiple regulatory landscapes, though much more work is to be done: Only 17% of respondents to the EIU survey say they are fully prepared for coming regulatory reforms. (See Chart 3.)

Chart 3. How prepared is your company to implement new regulatory reforms?

An Opportunity for Tighter and Smoother ControlsWhile nearly everyone recognizes the challenges inherent in increased regulation, less obvious are the benefits. A robust, integrated and centralized system that accommodates varied regulatory demands from multiple jurisdictions can form the basis for highly productive and efficient operations, including consolidating data that can also be used for revenue-generating activities.

In years past, everything from speed and ease of use to solid risk management and systems redundancy marked operational excellence within the financial services industry. They all remain crucial. However, the 2008 global financial crisis rearranged the mix. Handling regulatory complexity is now front-and-center, reflecting demands as well as heightened expectations from regulators and from the customers of financial services firms.

As a result, operational improvements that ensure strong regulatory management can help identify and then remove internal structural conflicts that slow or complicate procedures. They can assist in everything from audit trails to credit assessment and can provide management and boards with better monitoring.

They can make financial services firms more responsive to the needs of increasingly sophisticated and demanding customers, and, just as important, they can help improve the bottom line, which has been severely impacted by new regulatory requirements.


“For many firms [a centralized system] not only helps them deal with regulatory issues, but is a basic enhancement to their ability to operate efficiently,” says Randi Weinberg, a senior manager with global consultancy Kurt Salmon’s financial services practice. “You might be implementing a centralized system to address a regulatory concern as the primary motivation, but there are a lot of downstream benefits.”

We are prepared for most anticipated reforms and we

have initiatives in place to get ready for others

We are not prepared at all

Don’t know/Not applicable

We are fully prepared for the entire array of coming reforms

We are only partially prepared

0% 20% 40% 60% 80% 100%

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Technology in the SpotlightRegulatory compliance is heavily dependent on technology, which—despite becoming more affordable—still requires companies to make the necessary investments. For smaller firms, that financial burden can translate into sacrificing new markets or product innovation. Large firms with vast resources have an advantage in technology upgrades. Nonetheless, all companies, big or small, are now facing the challenge of integrating and unifying this technology across multiple functions and geographies.

Saxo Bank focuses on the overarching goal to create a unified system that reduces ad hoc operations as much as possible. According to Mr. Christensen, the key is what he calls “our one-bank, one-platform strategy.” But “if it has to be done manually, then we do it manually. Otherwise technology is always our first choice.” He adds that technological advances over the past decade or so have steadily improved and heightened the reliance on computerized solutions.

This electronic infrastructure is especially critical to regulatory demands, Mr. Christensen says. It provides an audit trail. It offers proof that processes are standardized and compliant. Of importance, regulators are not the only ones who can easily observe compliance; so, too, can a financial services firm’s own executives and its board.

Developing more transparent reporting processes

Monitoring the regulatory reform agenda and assessing

the operational impacts

Don’t know/not applicable

Other (please specify)

Building automated operational processes that integrate risk

management, audit trails and compliance functions

Attracting and developing stronger risk management skills

0% 20% 40% 60% 80% 100%

Center-of-Excellence StrategyJuggling multiple product offerings, regulations and regimes in many different countries requires a sophisticated architecture in control and in infrastructure. It requires careful planning, manpower and capital. While each organization may put its own imprint on regulatory-related operations, the key is system unification and integration. Often, the most successful institutions establish a specialized team that has global responsibility and that receives assistance from local experts.

“Many firms set up a center or a function that actually pulls all this together, implements a framework internationally and works as a leader to help these different international resources to manage the regulatory and compliance functions in a similar way,” says Ms. Weinberg, who has studied the process.

Construction of automated operational processes that integrate risk management, audit trails and compliance functions is cited by almost half of financial services executives as the best way to respond to more intense regulatory and governance requirements. (See Chart 4.) State-of-the-art technology forms the foundation, with local specialists and expertise a necessary support.

Chart 4. What measures can operational units take directly to improve your firm’s response to more intense regulatory and governance requirements?

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A Client-First Environment in New MarketsRegulatory compliance on a global scale is, of course, much easier said than done. Each jurisdiction has its own demands, reporting protocols, calculations and idiosyncrasies. Even something as supposedly universal as the upcoming Basel III global accord on bank capital and liquidity will be subject to the interpretations of country regulators.

Robert Crudup is executive vice president at SEI, a $600 billion money management firm. He describes a constantly changing environment in which regulatory compliance issues “keep coming. They never stop.” Sometimes, he adds, regulators will announce a “very large regulatory requirement with the guidelines to follow. Well, the guidelines don’t sometimes come as quickly as they should and the onus is on us to get to the finish line.”

Accordingly, banks are spending time reviewing their operations in each country and deciding when and how to shift capital allocations in or out of legal entities.

In-House Solutions Versus Outside ExpertiseBalancing in-house expertise with external support is always a difficult call for operations. Regulations-related systems are no exception. While larger financial institutions can choose between constructing a system in-house or going outside, many others must outsource. Regardless of the choice, the emphasis must be on systems integration. “The definition of optimal is different for every institution,” says Ms. Weinberg. “Both in-house and outsourcing require the same level of oversight, and the more and different systems you have, the more difficult integration is.” This would indicate the strategic value of using the same technology or vendor for different outsourced systems.

The increasing availability of affordable technology through third-party vendors allows smaller firms to continue to compete in an increasingly complex, highly regulated marketplace. Such is the case of Saxo Bank. While due diligence from prospective clients once focused on risk management, these days, it’s “How do these guys deal with regulatory complexity?” says Mr. Christensen, who believes that having best-in-class systems offers a real competitive advantage. “It lifts a bit of the stone from the hearts of smaller institutions that feel regulatory obligations are very overwhelming” and a huge cost and a drain on resources, he says.

Embracing Regulations Through Corporate CultureCompliance and governance demands from customers and regulators are here to stay. As a result, a business ethos that accepts, if not welcomes, regulatory oversight is a worthy goal of all financial services firms.

“For the more sophisticated investors, it is important to know that the products they buy and are being offered to them in a given jurisdiction are safe and compliant,” says Mr. Christensen. “It [compliance] has added a lot of complexity. It is costly and takes up a lot of time. But it has some significant competitive advantages when you have an approach like ours… able to meet the challenge and do that in an efficient manner.”

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“Regulators won’t go away; they are here to stay,” concludes Dmitry Pugachevsky, head of research at Quantifi. “The sooner financial institutions admit this and embrace this, the sooner they can benefit from a lot of operational plusses.”

Regulatory management and control must be integrated with the rest of operations. That goal, however, may be at odds with the perception of some employees who consider regulations and compliance something distinct and separate from other business functions.

To overcome this, financial services firms need to work toward instilling a culture of compliance. They will need to hire regulatory and compliance specialists and empower them. These firms will need to educate all staff, with management leading by example. It’s not enough for executives to comply, they need to truly embrace the changes and integrate them into every aspect of operations and the client experience.

ConclusionIn the past, many financial services firms operated various product or market platforms that were independent, not replicated elsewhere and difficult to manage across the overall system. Now, regulatory and compliance-related pressures are forcing an overhaul of those platforms to standardize them across offices and regions.

A centralized system of regulatory and compliance operations has its benefits. It allows a firm to embrace best practices, coordinate policies and procedures and identify required resources. This is critical not only for accurate and on-time communication to regulators, but it also creates more streamlined, efficient operations. All good for businesses and the customers they serve.

“The more that these institutions are struggling and being challenged by all the requirements, the more likely it is that vendors and service providers will develop tools for managing those challenges and that multiple institutions will use the same tools.” ~Randi Weinberg, senior manager, Kurt Salmon

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Economy & Finance

Finding Advantage in the New Normal