Regulatory Change in Banking: A Holistic, Cohesive Response
Regulation persists as a major challenge for the banking and capital markets industry.
Over the last several years, banks have had to deal with an ever-increasing number of overlapping regulations established by a diverse, uncoordinated set of regulators across many locations. The increase in and volatility of these regulations have created far-reaching operational challenges. In fact, regulatory change programs now account for more than 60% of “change-the-bank” budgets. In short, the pace and complexity of regulatory change has significantly hampered banks’ ability to change and grow their business.
Despite insights gained from coping with and managing regulatory change, most banks still lack a holistic framework or methodology to respond to these regulatory issues. Instead, banks take a reactive approach to regulatory response. As a result, as regulators continue to increase their scrutiny of banks, monetary fines imposed as a result of enforcement action are growing exponentially.
There is a solution: To stem the tide, banks can shift toward a more holistic, cohesive regulatory response mechanism, one that is underpinned by a more agile organization, a more balanced risk-reward corporate culture and a more consistent change methodology. Put into practice, this approach includes the following steps:
1. MAKE THE ORGANIZATION MORE AGILE IN ORDER TO SMOOTHLY OVERCOME ANY REGULATORY CHALLENGES
Most banks struggle with significant change due to indifferent business priorities or highly complex organizational, operational and IT structures. Banks should redefine their target operating models to turn themselves into more agile organizations. Options for consideration could be:
• Business differentiation: Reduce the operating surface area of the organization and focus on core activities. This means that nondifferentiating activities should be outsourced or moved to a utility supplier.
• Operational automation: Gain an appropriate balance between automated and manual systems. Where professional judgment and advice are required, human intervention may be appropriate — but for many other processes, a higher degree of automation is desirable to reduce the risk of errors.
• IT infrastructure: Typically, IT infrastructure is paralyzed or overburdened by a huge number of overlapping applications. Rationalizing the application portfolio is fast becoming a priority for banks.
2. DEVELOP A MORE BALANCED RISK MANAGEMENT CORPORATE CULTURE
Defining a risk appetite is essential to developing and embedding a balanced risk culture. Adopting a clipboard approach to Risk, Compliance or Internal Audit is no longer enough, as even a slight breach by a single individual or team can threaten the entire organization’s stability. With fines and penalties increasing, banks’ corporate culture must dramatically change to make employees more aware of the risks affecting the business.
While most banks have already succeeded in making employees well aware of issues and objectives, more effort is required to embed a corporate risk management culture aimed at making employees as sensitive to GRC issues as they are to commercial objectives. To succeed, any major corporate culture change needs to be supported by a change in values, appropriate training and effective controls and tools.
3. IMPLEMENT A BUSINESS–RISK PARTNERSHIP MODEL
As regulation is now central to banking activities, strategies should be closely tied to it. Governance, risk and compliance (GRC) professionals should therefore be business partners involved in each step of business strategy development and implementation. Typically, GRC professionals only deliver advisory opinions. But banks should instead implement a framework or model to encourage a business–risk partnership so as to put business strategies, risk management and compliance at the heart of the organization.
4. ANTICIPATE REGULATORY CHANGES WITH CONSTANT HORIZON SCANNING
Banks must stay ahead of regulatory trends. An effective strategic and organizational plan relies on a strong capacity to anticipate key changes. Banks need to engage experts and take measures to grasp the full landscape of regulations, understand their implications and foresee changes to the business.
Successful banks assess the future regulatory landscape across a 2 – 3 year timeline through comprehensive and thorough horizon scanning, impact assessments of the business and consultation with regulators.
5. ADOPT A COMMON METHODOLOGY TO ADDRESS REGULATORY ISSUES AND CHANGES
Adopting a common methodology can target efficiency and aim to reduce the size of the change portfolio. Banks can no longer finance an ever-growing regulatory change portfolio, as they need to allocate (or defer) budgeted funds for new strategic transformation initiatives. Banks and their advisory partners should explore regulation overlap and aim to merge regulatory programs — for instance, by reviewing regulations related to EMIR and Dodd-Frank to identify common changes, and then leveraging precious expertise and resources to address multiple and comparable requirements.
In addition, the profitability of some activities is seriously affected by regulations. A common regulatory change methodology should take this into consideration and assess business, operational, financial and customer impacts to help banks make the most strategic choices.
HOW CSC WILL HELP YOU
The demands of regulatory compliance require banks to create new frameworks for systems and data. Banks that make these changes can not only attain regulatory compliance, but also enjoy new efficiencies and create the potential for innovative services that deliver new revenues while keeping customers satisfied.
With its deep industry experience and technology-agnostic approach to delivering solutions, CSC helps banks get the maximum benefit from their risk management and regulatory compliance challenges and initiatives.