The financial services sector is often driven by regulation these days. Organizations in the sector can be forgiven for focusing their resources on ensuring compliance with Financial Services Authority initiatives such as Treat your Customers Fairly (TCF), Know your Customers (KYC) and Solvency II – not to mention international regulations such as Basel III and the Single Euro Payments Area (SEPA). However, by focusing so tightly on compliance, organizations need to be careful not to neglect their internal performance measures. You need to check if you are getting some business benefits and value with these compliance programs.
In my opinion the way to ensure ‘beneficial compliance’, rather than just a tickbox exercise is to implement properly thought out corporate performance management (CPM) systems, which can ensure compliance while delivering the necessary insight to improve organizational performance. With effective CPM, an organization does not need to choose between regulatory compliance or improving business performance because CPM provides the foundations for both.
One regulatory challenge facing FS firms at the moment is the FSA’s TCF stipulations, which revolve around ensuring customers are provided with a fair service. Consumers need to be targeted accordingly; provided with clear information; given suitable advice and products; and they must not be subject to unreasonable post-sale barriers.
KYC requires ‘fact finding’ so that sufficient information about a customer's personal and financial situation can be obtained before any advice is given. This requires good clean data, clear approval and oversight processes.
Solvency II is another regulatory challenge and requires a fundamental review of the capital adequacy regime for the European insurance industry (in many ways it mirrors Basel III for the banks). Solvency II will require higher levels of data quality and management, greater levels of disclosure and transparency, together with additional and more frequent reporting.
The regulatory pressure faced by financial service organizations was recently highlighted by the FSA’s fine imposed on the Combined Insurance Company of America (CICA) in December 2011. The CICA was fined £2.8 million for failing to fully embed a culture that ensured its customers were treated fairly. As part of the failings, CICA did not have ‘adequate systems and controls’ to ensure that its sales agents had the necessary skills and knowledge to provide suitable advice.
So, what constitutes ‘adequate systems and controls’ according to the FSA? In order to meet regulatory requirements, financial service organizations need to effectively obtain and securely hold key information about the company and its customers, and then analyze and report on this information in a meaningful way, so they can prove staff have been trained appropriately or customers have been given correct information clearly, for instance, via a ‘key facts’ box. This cannot be achieved without the right CPM software systems. These systems can provide the level of data interrogation, reporting and monitoring required to deliver informed and fair advice – or indeed to support the requirements of Solvency II.
What is a CPM system?
A corporate performance management system helps organizations to manage processes, costs and people in a more effective and optimized manner, thereby providing visibility and transparency about what is going on within the organization.
CPM encompasses cost management; revenue and profitability management; forecasting, planning and budgeting; and analytical capabilities. In practical terms, it provides crucial and real-time information at the touch of a button, delivering instant company and customer intelligence.
A CPM system that enables a clear understanding and reporting of data, together with predictive capabilities, is required to comply with many FSA regulations. Without these system components, financial services companies will not be operating a coherent data management strategy, potentially risking a breach of FSA rules or at the very least missing out on efficiencies.
There are a number of CPM solutions on the market, all claiming different levels of functionality. Two key solutions that when integrated together, can deliver a firm foundation for enabling FSA compliance are budgeting, forecasting and cost management system – for instance, IBM Cognos TM1 and its predictive analytics solution, IBM SPSS. There are, of course, lots of alternative systems available too.
These single platform solutions deliver a way to manage an organization’s information, providing a real-time approach to consolidating, viewing and editing enormous volumes of data. They enable the creation of timely, reliable and personalized forecasts and budgets. Importantly, these CPM systems can also provide organizations with the analytical capability to understand and digest their data so that they can make informed decisions and provide considered advice.
With insight at their fingertips thanks to CPM solutions, organizations are provided with the basis for effective KYC and TCF compliance. For example, if one customer is charged £100 for an insurance service and another is charged £50 for the same service, can it be proved that the cost difference is fair? If information obtained from the CPM solution can prove that it costs twice as much to service the first customer due to the complexity involved in the underwriting process and the extra security checks required because they are a high risk customer, this proves an understanding of the customer and a solid rationale behind the different prices charged.
Predictive analytics solutions, such as the IBM SPSS system referenced earlier, provide insight into trends such as changing product volumes and rising price points. They help organizations to anticipate and plan for change with the aid of scenario modeling. These models can then be used to improve outcomes – for instance, SPSS can help to predict the possible impact of another market crash, a 20 per cent drop in customer numbers and the liability of a certain event. Having the means to realistically assess financial risk and to develop workable strategies should the worst happen is crucial to achieving Solvency II compliance.
Improving business performance with CPM
Consumer and competitive pressures add to the stifling regulatory pressure faced by many organizations, creating a challenging financial services landscape that could appear overwhelming. Some organizations may feel as though there is far too much to react to and only minimal resources in which to do it. With the pressures surrounding the financial services sector unlikely to dissipate, it is important for organizations within this sector to recognize that CPM systems can ensure FSA compliance without internal performance measures having to take a back seat. In fact, CPM systems can provide both FSA compliance and the foundation for improved business performance.
The profile of a successful and high performing organization is one that clearly understands where it’s at, where it wants to go, how to achieve its goals and how to best deal with the obstacles along the way. A clear understanding, interpretation and reporting of its data is key to success and this includes ensuring that cost management, forecasting and planning, and profit maximization initiatives are clearly linked up.
A large number of organizations may already have CPM solutions in place but how joined-up are they? An organization may boast the use of CPM solutions but operate them in silos, meaning that all the threads are not joined-up for a common performance perspective. Those organizations that do link up all their CPM solutions will be considerably more successful than their counterparts. For instance, using predictive analytical systems can reveal unexpected patterns and associations. This information can be used to develop front-line interaction guidelines, such as to prevent high-value customers from leaving, to help sell additional services to current customers, and to develop successful products more efficiently. The outcome is an organization that understands and effectively engages with its customers, understands its cost base and ultimately operates competitively.
According to a joint IBM institute for Business Value and MIT Sloan Management Review study (published in December 2011) which surveyed 4,500 managers and executives from more than 120 countries, 58 per cent of organizations now use analytics (arguably a component of CPM) to create a competitive advantage within their markets or industries. The survey also reveals that organizations that do apply analytics are more than twice as likely to substantially outperform those that do not. The figures speak for themselves.
Understandably, many financial services organizations focus resources on trying to comply with FSA regulations and neglect internal business performance. However with the right, integrated CPM solutions and analytical ‘big data’ processes in place, compliance and internal performance improvement can go hand in hand.