An Avalanche of Compliance Initiatives

Finance companies are facing fatigue – even exhaustion – with a deluge of regulation and compliance initiatives that shows no signs of slowing down.

But strategy manager Bart Patrick argues that the avalanche of new rules creates an opportunity for “spring cleaning” and even a sunny future for firms that grasp how to mine their data and go beyond compliance.

Successful financial services organizations can extract competitive advantage out of the growing welter of rules that, at first glance, seem designed to distract them from their core activity of making money.

While everyone has come to terms with the compliance obligations of the European regulations – for instance, Basel II – there’s a lot more going on out there. For example, the Markets in Financial Instruments Directive (MiFID) comes into effect on Nov. 1, and hot on its heels the following month comes the third EU directive on anti-money laundering. And the list goes on and on.

But there are solutions that can help companies become more profitable and serve their customers better while achieving compliance.

Historically, some compliance officers were perceived as standing in the way of business owners who wanted to trade. Since then, Sarbanes-Oxley in the US and Basel II in Europe have passed the buck firmly to the boardroom. As a number of high-profile cases have shown, you might have five homes and a Lear jet, but if you don’t comply with regulations, you'll end up in jail. As a result, compliance officers now have more clout because the board has to back them; they are no longer considered the equivalent of corporate traffic wardens.

Competitive advantage
But compliance is one thing; turning it around into competitive advantage is another. These two objectives are linked by quality data and analytics, enabling firms not only to obey the rules, but also to drive up profit at the same time.

When new regulations loom upon the horizon, many firms instantly go into a denial phase because they believe that they already have in place sufficient systems to adequately monitor such things as operational risk, market risk and credit risk.

This is rapidly followed by a compliance phase, when the new challenge sinks in. Often this means shoring up existing systems, once they have been found to be inadequate during the denial phase, to provide a series of silo-style, tactical solutions to become compliant.

But this is not a great way of doing things, as firms can end up with a series of processes and workplace changes that merely create friction and a drag on future progress and profitability.

Underlying everything is the data issue. Given the size and history of many large finance firms, they have data everywhere. This data can be 20 or 30 years old and of dubious quality, which is a serious impediment to progress. Companies need to understand what they have and make this accurate and available before moving on.

The final phase occurs when the realization that compliance is not enough sinks in. Companies are in the business of making money and creating shareholder value rather than just compiling data purely to become compliant. The good news is that the two can be achieved  simultaneously, and the method to accomplish this is subtly different from what happens currently.

Accepting change
Change management nets millions for experts in the field. Most people in the industry are wary of MiFID, a major part of the EU’s scheme to integrate Europe’s financial markets.

However, MiFID presents new opportunities for data cleansing, consolidation and analysis because of best-execution reporting, client classification and appropriateness-testing regulations requiring companies to understand the nature of what they are selling, and who they are selling it to, in far more detail than ever before. Rather than just toeing the line to meet these regulatory requirements, companies should aim to help customers, too, by using analysis to achieve better insight into what clients want and the risks they are prepared to take. Matching a client’s risk profile to the risk level of an investment portfolio provides opportunities for selling more and higher-value items while achieving compliance and meeting customer needs -- an attractive proposition.

So the subtle change in thinking alluded to earlier is as follows: To view new regulations as a catalyst for change that can unlock the door to profitability, rather than just as a cost of doing business.

Bart Patrick is Risk Strategy Manager at SAS.