Finding advantage in the new normal

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

in the New Normal

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

New Markets and New

Rules

More 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.”

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 Controls

While 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%

Technology in the Spotlight

Regulatory 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

Monitoring the regulatory

Building automated operational

processes that integrate risk

management, audit trails and

compliance functions

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

Center-of-Excellence

Strategy

Juggling 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?

A Client-First Environment in New Markets

Regulatory 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

Outside Expertise

Balancing 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 Culture

Compliance and governance demands from customers and regulators are here to stay As

“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

“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

Conclusion

In 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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