The wave of new regulation introduced post-2008 has resulted in a significant increase in the amount of time and resources firms are required to spend to meet compliance and reporting requirements. These requirements have left no area of the firm untouched, extending from stress testing at the prudential level through to client onboarding at the customer level, and have created numerous new policies, processes and roles. Furthermore, these additional regulatory requirements have driven the need for firms to:
- Use their data more effectively to provide senior management with more awareness of potential risks and lack of compliance
- Promote strategic collaboration between departments, including across jurisdictions.
Getting a grip on the data
A key response to the financial crisis by the UK regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), has been the introduction of the Senior Managers Regime. After finding it difficult to hold specific individuals responsible for the actions which led to the crash, the UK regulators have sought to increase the accountability of those at the top of firms by making them personally accountable for the activity undertaken in the area they manage. This includes a statutory duty of responsibility, which requires executives to take reasonable steps to prevent regulatory breaches from occurring on their watch.
For executives to do this successfully, and identify anomalies early on, they require accurate and meaningful management information (MI). Effective MI comes in a variety of forms – including trade surveillance metrics and results of communications monitoring – and provides managers with significant insight into their departments, particularly in areas which may not previously have been a day to day priority, such as having visibility of internal policy breaches. Producing this type of reporting requires access to accurate data, sophisticated data analysis techniques and a process for transforming the findings into an impactful visual. When done well, it allows executives to identify and mitigate issues early and address potential risks and breaches before they spiral into serious compliance matters. Understanding and making sense of data is both a challenge and an opportunity for firms and with the Senior Managers Regime being rolled out to all remaining FCA-supervised firms in 2018, the impact will be felt across the industry.
No longer just a problem for Compliance
The quantity and complexity of recent regulation means that financial institutions need to look for areas which require, or would benefit from, strategic collaboration. Opportunities for collaboration can be found in many areas – for example, delivering reporting requirements or process improvements. The need for this form of collaboration is fuelled in part by regulatory necessity but also by a desire for firms to improve their operational efficiency in the face of a prolonged period of low interest rates which has constrained profits. There has also been a big shift within institutions in recognising that financial regulation is no longer just a problem for Compliance, or the back office, but a challenge which requires input and cooperation from across the entire firm.
Take the Senior Managers Regime as an example; this has created a larger role for the HR function by way of Senior Manager registrations and liaising with business lines to ensure individuals have sufficient experience and probity. A regulation aimed at producing more individual accountability will require significant engagement from individuals across all departments and will aim to ensure that responsibility for adhering to the rules is distributed across the board – and not just left to Compliance. The EU’s Market Abuse Regulation (MAR) rules on the safe harbour of market soundings, which came into effect in July 2016, is another example of the necessity of close inter-departmental collaboration, this time between Compliance and the front office.
Furthermore, collaboration is also required between departments located in different jurisdictions. An important feature of many of the post-crash regulations, including Dodd-Frank (and the associated Volcker Rule) and MAR, is their extraterritorial nature – whereby employees and entities in jurisdictions outside of those where the regulation is enforced can still fall into scope for its provisions. Collaboration between departments across national borders is essential if firms are to fully comply with these rules. Departments will require communication channels, for discussing ideas and sharing information, and must plan with one another to ensure an effective division of labour and to agree a timescale to which all participants can stick.
The marriage of data and strategic collaboration
In our view, whilst both data and strategic collaboration are important in their own right they should not be viewed in isolation. Instead, better data analysis and use of management information should be used to drive strategic collaboration, for example within compliance and regulatory change, in order to lead to better outcomes. Where data reveals the existence of a frequent policy breach or a forthcoming reporting requirement, this should act as a signal to kick-start collaboration between the key stakeholders to ensure that the matter can be assessed and a solution devised and implemented. In addition, effective analysis of data can identify the areas, departments or customers of a firm which pose a particularly high risk. With this information in their possession, key stakeholders, including Compliance, Risk and the front office, have an incentive to work together to either monitor these areas more closely or devise a plan to reduce the risk altogether. Whilst this sounds simple, institutions are typically siloed in structure and have in the past struggled to collaborate effectively. There is also an even bigger opportunity to improve collaboration across organisations which the sector is only just starting to recognise.
Turning challenge into opportunity
Firms are having to invest significant funds to meet the requirements of financial regulation in an era where profits are harder to come by. Clearly this is a challenge, however responding to this wave of regulation provides an opportunity for firms to boost the effectiveness of their data analysis and to promote collaboration between different stakeholders. By focusing on these two key themes, firms can ensure that they are getting a head start when it comes to potential risks and are establishing the platform for future growth.