Is there an opportunity for strategic change within ‘The New Normal’ of regulation?
Recently GFT surveyed 66 organisations, including global and domestic investment banks across the UK, Europe, North America and Asia, with the aim of establishing the attitudes of major Capital Markets firms towards ‘The New Normal’ – a state of constant regulatory change. Jeremy Taylor (Head of Business Consulting UK, GFT), asks if banks are still making the mistake of viewing regulation as an exercise in compliance, rather than as an opportunity to implement strategic and business change inside their organisations.
The overwhelming majority of respondents (95%) in our industry wide survey believe they do indeed operate in an environment in which regulatory directives continue to increase. They recognise the business benefits on offer from regulation, but over half (53%) of organisations view regulatory projects from a compliance sign-off perspective (or box-ticking exercise).
Arguably, this explains why such a large number of respondents (86%) admitted that their organisations pursue tactical work-arounds to meet regulatory requirements, reinforcing the belief that regulation is an exercise in compliance. The use of tactical work-arounds may tick the compliance box but they invariably lead to a legacy of technical debt which requires remediation at a later date. All of which ultimately puts constraints on banks to implement strategic change and innovation. It needs to be recognised and acknowledged that regulation is here to stay and we are now at a point where banks need to think more strategically, placing more emphasis on improving their operational processes rather than simply focussing on compliance.
Culutral shift by banks in their approach to dealing with regulation required
Within recent years we have seen the volume of regulation that impacts banks rise dramatically to the current position of more than 60,000 pages of regulation. It is estimated that by 2020 this will have grown to over 120,000 pages, an enormous challenge for any organisation to manage. In addition, the complexity of the business models found inside banks, combined with the legacy IT systems and the overlapping impact of global regulation adds to the difficulties and complexity in dealing with the problem. Under this tsunami of regulation, it is perhaps no surprise that banks have so far focused mainly on meeting regulatory compliance requirements rather than taking a strategic approach.
‘The New Normal’ of constant regulatory change requires a cultural shift by banks in their attitude and approach to dealing with and managing regulation. Unless this takes place, banks will be constrained by compliance issues, and will be unlikely to capitalise on realising potentially benefits created by the drive for greater transparency, more efficiency and ultimately lower costs. Whilst it can be considered a burden, greater regulation can provide the opportunity to tackle many of the longstanding issues that have affected the banking industry for many years.
Regulation needs to be viewed in much wider context
The optimal approach to ‘The New Normal’ is therefore not about solving and completing one regulatory challenge at a time; regulation needs to be viewed in a much wider context. Banks should identify how each regulation will impact their business units across the firm as a whole, rather than assessing each regulation within individual business silos.
Adopting a holistic view will allow banks to understand how an individual regulation that affects one part of the business or trade lifecycle may have a positive impact locally, but perhaps a greater negative on another part of the business. A holistic view of regulation also means that regulation is not confined to specific individuals or departments. For too long compliance has been viewed as a responsibility for a few people working in the Compliance Department, or within IT; this has to change.
To be successful, banks need to begin thinking about how this new and evolving environment of constant regulatory change will transform the industry. They should be thinking strategically about what kind of bank is likely to be successful in this challenging future, and identify the key characteristics of what success looks like.
What we can be sure of is that data will continue to play a critical role in how banks deal with regulation in the future. The regulatory environment asks more questions of banks on how they are governed and managed. The ability to answer these questions relies on having access to high quality data and the IT infrastructure to support this data. Already we have seen trade reporting demands and regulations such as BCBS239 increase the importance of data management and quality; this is set to continue and will be crucial in ‘The New Normal’.
Regulation is here to stay
Regulation cannot be viewed as a temporary phenomenon, it is here to stay. In this new regulatory environment, banks must go beyond compliance and approach regulation strategically rather than tactically. To succeed in the ‘The New Normal’, banks need to recognise that this is an opportunity to change and rebuild their business models, their architecture and their organisational structures. The successful investment bank of the future is likely to look very different from those that exist today. Every bank must strive to review what all of the existing and incoming regulation means for them and adapt their business models accordingly. If not, they face a dismal and gloomy future, rather than realising the opportunity for strategic change and growth.
Banks are therefore indeed continuing to make the mistake of viewing regulation as an exercise in compliance, rather than as an opportunity to implement strategic and business change inside their organisations. This was the prominent theme to emerge from our research conducted earlier this year.
A version of this blog appeared on Finextra, click here to view the entry on the Finextra website.
