It's been said that the only things certain in life are Death and Taxes. For those bankers among us, I'd like to add one moreÖ Regulations. Certainly regulatory compliance continues to be top of mind for all bankers, as does the search for technology to best respond to the ever changing requirements.
In this edition of the Twelve Days of Digital Transformation blog series, here is a look at key regulatory-related areas that will impact the financial sector in 2018 and beyond -- CCAR, PSD2, IFRS 9, MiFID II, FCA-REP CRIM, KYC, AML, GDPR, and Brexit. And, a view of how the trend toward proactive compliance using platform-based technology is impacting banks for the better.
Risky Business
Since the decade ago financial crisis, bankers have perceived compliance risk as one of the most significant ongoing concerns. Both regulatory fees and the scope of regulatory focus have continued to expand in relation to bank earnings and credit losses.
At one end of the spectrum, community banks and regional banks are perhaps disproportionately burdened than their larger counterparts. Yet the larger banks including the top 20 Systemically Important Financial Institutions (SIFI) are held to higher standards, including the requirement to hold higher amounts of capital reserves. What is mind-numbing is that new regulation stemming from the financial crisis has cost the six largest U.S. banks far in excess of $70 billion.
Tighter compliance regulations have challenged financial institutions in a variety of ways. Yet those who adapt best may enjoy a distinct competitive advantage. -- McKinsey
Safe to conclude then that compliance remains a hot topic for all banks in 2018, with no reprieve in sight for the near term. The pressures are intense yet there is also an opportunity here for banks that can position themselves to proactively deal with compliance.
U.S. Stress Tests Encourage Adopting a Strategic Lens
With January 2018 just around the corner, and the Federal Reserve Chair nominee "Jay" Powell starting his role, industry pundits indicate that capital standards requirements are expected to remain about the same. But what's refreshing is that the stress tests processes and models are expected to become more transparent. This should make it simpler for banks to understand how their assets would perform as part of the Comprehensive Capital Analysis and Review (CCAR aka stress tests) to assess capital reserves.
Since stress testing is an integral part of capital reserves, banks have the unique opportunity to interpret this regulation with a strategic lens enabling them to gain competitive advantage. By implementing an integrated platform that can help to manage CCAR more effectively and transform critical processes, banks can manage compliance requirements holistically and proactively. This includes addressing the frenzy of mergers and acquisitions and the related regulatory implications.
Eurozone Regulations Drive Digitization
Senior bankers in the European Union (EU) are facing pressures as effective January 2018 they must manage a handful of new legislative demands, including PSD2, IFRS 9, MiFID II and GDPR. This in addition to the standard stress test conducted by the Prudential Regulation Authority (PRA) promising to promote the safety and soundness of all firms.
As we kick-start the new year, regulations such as the European Union's General Data Protection Regulation (GDPR) and second Payment Systems Directive (PSD2) will certainly change the paradigm. PSD2 will allow customer data to be shared out by non-banks and industry experts expect PSD2 to revolutionise the payments industry by breaking down the bank's monopoly on their customer's data.
Customers will learn the value of their data, perhaps better understanding their bank's right to access, and their own right to manage their own data, and will no doubt expect tangible benefits in return.
A wise approach for banks in 2018 would be to digitize to extract appropriate insight from available data across systems, but only with rock solid permissions in place. This would improve customer engagement and enable the launch of new customer-centric offerings.
The International Financial Reporting Standard (IFRS 9) legislation provides a unified approach to classification and measurement of financial assets. This legislation is intended aimed to address perceived deficiencies in accounting standards which were believed to have contributed to the magnitude of the financial crisis. The legislation presents financial institutions with the challenge of calculating a lifetime view of their customers' future losses. In 2018 and beyond, banks could leverage their platform technology to digitize for the increased data visibility across all business units required to meet this legislation.
New Reporting Requirements Will Improve Transparency
Another major regulation to take effect is the Revised Markets in Financial Instruments Directive (MiFID II), and is expected to address potential issues around the buying and selling of securities. The intent is to provide investors with increased transparency around trading and fees, enabling them to make more informed decisions and affecting both sellside and buyside firms.
As one might expect, the reduction of financial crime remains a very high priority for the Financial Conduct Authority (FCA) in the UK. To ensure anti-money laundering compliance, the FCA published REP-CRIM and explicitly indicated their commitment to actively supervise firms whose business models present a higher risk of money laundering.
EU banks could well respond by implementing a digital transformation platform to address MiFID II reporting capabilities, while UK banks could do the same for effective FCA risk data aggregation and reporting requirements. The result? Improved compliance and increased transparency across the organization.
KYC and AML are The First Line of Defense
Fighting financial crime is not just a high priority for the UK, but rather a global concern. And this is precisely why Know Your Customer (KYC) legislation is in place. While KYC refers to the process of the bank identifying and verifying the identity of its clients, it also encompasses relevant Anti-Money Laundering (AML) regulations, of which proactively managing risk is one critical component.
When both KYC and AML compliance are implemented concurrently, they provide protections against misuse of the financial system for potential criminal activity any activity that ranges from financial fraud (endangering people's financial security) to profiting from drug businesses to funding terrorist activities. Banks that leverage a platform approach for KYC and AML in 2018 will not only strengthen the first line of defense, but will also enable proactive capabilities across the compliance spectrum.
Brexit Introduces Another Layer of Uncertainty
Equity markets do not respond well to any uncertainty, and especially when the events are unprecedented, such as Britain's decision to extricate itself from the European Union. The health of an economy is greatly influenced by the policies and regulations that govern its financial systems. In the case of Brexit, the crux of the matter is that no one can realistically predict future likely events in either Great Britain or the EU. That is in and of itself an economic problem impacting global markets in 2018, and raising the value of agile technology capabilities that can address change.
Finding a Competitive Advantage in Compliance
At the end of the day, regulations are aimed at retaining stability, safety and trust. What if banks could simplify their responses and alleviate non-compliance penalties,and instead channel these funds elsewhere, such as managing business processes or deploying digital technology across the business?
To reduce the risk of non-compliance to any of the nine regulatory areas, institutions are choosing integrated technology platforms that enable them to address multiple regulations efficiently and effectively. Banking leaders can transform all of their compliance processes and consequently stay a step ahead of upcoming requirements. Further, by taking a proactive approach and incorporationg compliance requirements into business processes,banks can improve operational agility and customer focus as well as effectively manage risk.
