Getting schooled in compliance initiatives

Finance companies are overwhelmed with regulations, but the new rules can create opportunities for firms that mine data and go beyond compliance

By Bart Patrick

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 – Basel II and Solvency II, its equivalent for the insurance industry – there’s a lot more going on out there.

The Markets in Financial Instruments Directive (MiFID), for example, came into effect on Nov. 1, and hot on its heels the following month came the third EU Directive on anti-money laundering. And the list goes on … and on.

Fortunately, there are solutions that help companies grow more profitable and serve their customers better while they achieve compliance.

Historically, some compliance officers have been known to stand in the way of business owners who want to trade. All that changed with Sarbanes-Oxley in the US and Basel II in Europe. These regulations passed the buck to the boardroom. As a number of high-profile cases have shown, you might have five homes and a Learjet, 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
Compliance is one thing, but turning it around to competitive advantage is another. The two objectives, however, are linked through quality data and analytics that can enable firms to obey the rules and drive up profit at the same time.

When new regulations loom on the horizon, many firms go into a denial phase because they invariably have all manner of systems already in place to monitor such things as operational risk, market risk, credit risk and sensitivity analysis, which are necessary to determine the level of economic capital that needs to be held.

Then comes a compliance phase when the new challenge sinks in. This often means shoring up existing systems to provide a series of silo-style, tactical solutions to make them compliant.

But this is not a great way of doing things because firms can end up with a series of processes and a workplace that merely creates friction and drag on future progress.

Underlying all that is the data issue. Given the size and history of many large finance firms, they have data everywhere, and it can be 20 or 30 years old and of dubious quality. And then there’s the problem that data captured in the past is of little use in taking the business forward.

Companies are in the business of making money and creating shareholder value rather than compiling data purely to become compliant. The two, however, can be done simultaneously, and the emphasis on how to achieve this is subtle but very different.

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. But its effects, like the big companies grabbing up the boutique firms that won’t be able to afford compliance, have yet to be felt.

On the bright side, MiFID presents new opportunities for data mining because of the volume of data that needs to be held to meet “Best Execution” criteria covering such things as order volumes, sizes, costs, price spread and client classification. Rather than just toeing the line to meet the requirements of the FSA, companies should aim at analyzing the data they’re required to gather in order to predict customers’ buying strategies and future highs and lows to help balance the ebb and flow of commerce.

The data can help customers, too, by giving firms a better insight into what they want and the risks they are prepared to take. Matching clients’ risk to the investment risk provides opportunities for selling more and higher-value items.

New regulations can unlock the door to new business, provided quality data and the right analytics to exploit it are in place.

Bio: Bart Patrick is Head of Risk Intelligence for the SAS UK office.