Compliance

03:44 PM
Alan Paris and Mahesh Muthu, eClerx
Alan Paris and Mahesh Muthu, eClerx
Commentary
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Making Regulation Work for You: How Banks Can Take Advantage of the New Rules

Regulation offers valuable business opportunities for financial services firms in 2013 and well into next year.

Regulation offers valuable business opportunities for financial services firms in 2013 and well into next year. Traders know that volatile markets offer profit possibilities that flat markets don’t. Regulatory volatility also offers banks the opportunity to pull ahead of competition by meeting regulatory demands at lower costs in both manpower and executive investment.

Five years after the global financial crisis, regulators are defining the rules to implement legislation, such as the Dodd-Frank Act in the U.S. Recently, the U.S. Government Accountability Office (GAO) estimated that only half the rules required have been adopted. The process is often unpredictable because the regulators are subject to lobbying and legal action as the rules are developed. One result is a great deal of uncertainty in the face of set deadlines.

The stakes in compliance are high, as recent fines and recoveries have proven. From Washington to London to New York, regulators have shown their readiness to impose unprecedented fines on global banks. In addition to the threat of penalties, banks face possible opportunity cost if they don’t have the systems and infrastructure, such as accurate reference data and Legal Entity Identifiers (LEIs) in place to support their operations

Coping with the Changes

Compliance with the new rules is expensive and time-consuming, and requires a variety of skills to fix data, systems, and processes that are often located all over the firm. Inevitably, tasks that demand cooperation from multiple silos and departments take time from executives who are already struggling to meet the changes required by regulation.

While the regulatory demands have increased – banks report that they must produce dozens or even hundreds of different reports to regulators – budgets have tightened. Leaders in developing smart compliance programs plan to replace silos of data with centralized utilities or hubs that can meet specific needs, such as client onboarding, pricing and product data set-up, document management, and swaps reconciliation.

Leveraging Investments

Regulations are expensive, so banks should look for steps they can take to meet more than one requirement, prepare for additional rules and avoid processes and technologies that may impede future compliance efforts. A key aspect here is linking data silos to a single data source that has carefully verified accuracy. With electronic records, most of this can be automated and only the exceptions require manual reviews. Where the existing records are on paper and need to be digitized, the best practice is dual teams with an auditor reviewing the work and correcting any discrepancies.

Identification data for know your customer (KYC) can be used for onboarding new clients, FATCA compliance Tax Identifier Numbers (TINs) can be linked to LEIs as they come into use. Using the same customer data in many areas saves money and also makes it vital to get the data right.

For banks, preparation for regulation is a distraction from their core business. Therefore, it is crucial for financial institutions to develop the skill sets, procedures, quality controls and workflows, including some automated workflows, to work efficiently and accurately

Putting it into Practice

Technology vendors are developing software to meet some of the new requirements, but it doesn’t always work as planned, especially in complex areas like corporate actions. For several banks, it is still necessary to identify bugs in new programs and work with their vendors to fix them while correcting any mistaken results. Because of regulatory deadline pressures, some software is going into production faster than is customary. For example, each time a specific bank adds another broker to a new system it has implemented, that bank could experience 1,000 or more breaks.

One particular bank had unsuccessfully addressed an 18-month KYC backlog. The firm knew its regulator was concerned that the bank had inadequate knowledge of its trading counterparties and was monitoring the firm for compliance.

Working with a BPO vendor, the bank was able to remediate the customer information for six months to clear the backlog. Thereafter, using a custom workflow tool, a team of 40 at the vendor’s site was scheduled to perform review of the entities on a cyclical basis.

Preparation for rules that have not yet been finalized adds another challenge for banks. For example, the CFTC is working on new swaps rules that will require an LEI to be used. Because the LEI initiative is still being defined by a G20 working group, the CFTC is calling its identifier a CICI, or a CFTC Interim Compliant Identifier. When the final LEI formats are decided, the bank needs to be ready to translate the CICI codes, if necessary.

Instead of a bank embarking on the complex and time-consuming process of hiring and training people for the project, it can hand the work to a BPO vendor that can provide highly trained, skilled staff ready to start immediately.

Focusing on the Future

As final rules come down the pike and regulators look to ensure compliance across the board, banks should increasingly look to BPO as a way to leverage their investments to get ready for multiple regulatory changes. Outsourcing turns a fixed cost into a variable cost and projects are completed in less time than it would take a bank to hire, much less train, internal staff to complete it.

Alan Paris is Financial Services Principal and Mahesh Muthu Financial Services Associate Principal at eClerx

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