Banks are accustomed to dealing with complex regulation. But the challenges of compliance are different in the post-financial crisis era of Dodd-Frank, according to Bob Contri, New York-based Deloitte's recently named vice chairman, U.S. Financial Services. Contri, who most recently led the firm's banking and securities practice in the U.S. (and will continue to do so in his new role), was appointed to replace Jim Reichbach, who is moving into a different role at Deloitte. Financial services is Deloitte's largest practice and includes banking and securities, insurance, private equity, hedge funds and mutual funds, and real estate. Given the current environment, however, a lot of the expertise within the practice will be "redirected specifically to some of the implications of Dodd-Frank," Contri reports.
The twist, he adds, is that today compliance must be coupled with strategy. "This is the first time in my career that strategy and regulation come together -- you can't think strategically about what you want to do with a financial institution without thinking about regulation," Contri says. One of his goals at Deloitte is to "bring together the regulatory expertise and consulting expertise to think about implications and end-game thinking" -- that is, go beyond a short-term "to-do" list of compliance requirements.
Contri emphasizes that this means "thinking about strategy in a different way, through more of a regulatory lens." Complicating this approach is a continuing "level of uncertainty. There is still so much uncertainty around the level of economic recovery," he says. "It's hard to make strategic decisions in an environment where there is still a lot of geopolitical and regulatory uncertainty."
The still-recovering mortgage market is another area where Contri expects Deloitte to fine-tune its approach. "Two or three years ago we created a big initiative around distressed debt. Commercial real estate was having big issues [at the time], but who could have foreseen everything happening in the residential mortgage market?" he reflects. "So that's a bit of a shift for us, going deep into the mortgage space. But the bigger questions are, what is the mortgage market going to look like? Will securitization come back? What's the future of the servicing business, because the economics will really change due to regulation. There are big unanswered questions about the future of the mortgage market."
The Data Management Challenge
Closely related to these issues is the challenge of effective data management, Contri notes. "Coming out of the financial crisis, most institutions would agree they couldn't aggregate data as effectively as possible to manage risk or customer focus," he says. He identifies "two big trends in technology: one is around data, data architecture data infrastructure and data standards. That [will be] the driver of mortgage regulation and customer demands in the future. The other is and around collapsing silos, really replacing the legacy technology that in many cases is siloed."
According to Contri, Deloitte is seeing "a big push to business platform renewal. It's almost like Y2K -- companies will spend significant dollars to replace systems that are very antiquated or very siloed, like core banking systems, settlement systems or wealth management platforms. A lot of investment in technology has been at the back end, but [there will be] a lot of opportunity and investment around core business platforms, renewing them to bring down costs, run the business and garner information around the business."
Furthermore, Contri thinks this is a good time for banks to consider new or emerging technology strategies such as cloud computing and "other technologies that allow you to integrate or replace legacy systems with standardized solutions. Those will become very popular," he says.
Who within the bank -- IT leadership or line-of-business management -- will be responsible for leading these kinds of blended initiatives? Contri suggests that, just as with technology and process, there are management silos that will need to be dismantled for banks to respond effectively to today's market challenges. "I think it's become more complex," he says. "There are functions within large financial institutions that used to be able to operate autonomously that can't any more. It requires a level of integration that is hard in many organizations. Risk, financial, compliance, the general counsel office, really have to come together to manage the regulatory environment, and they have to do it with technology.
"The old days of functional silos within large organizations -- that's a model that's becoming less and less effective," Contri continues. "The issues they have to deal with are so integrated. The complexity of the environment is challenging the legacy organizational functions of these large institutions -- always have had trouble managing across the areas of the business. That's where we think we have a strong role to play."