By Reetu Khosla,
Risk and Compliance Solutions,
Sibos 2011 offered an insight into the biggest challenges facing financial services providers. Regulation, mitigating risk and economic uncertainty were among the main themes of discussion at the conference. Indeed, at a time when banks are struggling to prevent another global economic crisis, they are faced with the challenge of maintaining compliance in a fast-paced regulatory environment, while continuing to attract and retain clients and driving down operational costs.
Notably, upcoming banking regulations appear to take a much more aggressive approach to customer protection that obliges banks to transform their compliance practices and implement stricter controls.
Since March 2010, for example, the UK Financial Services Authority (FSA) has adopted a strong customer protection strategy which will enable the regulator to actively intervene in product design for the first time.
The recent Retail Conduct Risk Outlook 2011, which summarises the agenda of the FSA and its forthcoming replacement, the Financial Conduct Authority (FCA), gives us an early indication of the underlining themes of the upcoming FCA regulations. In short, the FCA will be able to directly intervene at any stage of the product lifecycle, from the initial concept development, to marketing, sales and support, to ultimate product withdrawal. By strengthening the control of the full product lifecycle, the FSA is looking to prevent the introduction of products that could be potentially damaging to the consumer and avoid unfair treatment.
With the same underlining purpose, the Financial Industry Regulatory Authority (FINRA) has mandated expanding financial institutions to extend their Know Your Customer (KYC) programmes to include suitability. This means collecting additional data that can help determine what products are most suitable for each customer and prevent mis-selling practices.
Other new regulations such as the Retail Distribution Review (RDR), Treating Customers Fairly (TCF), Mortgage Market Review, etc. are all focused on restoring consumers’ confidence in the banking sector and ensuring customer satisfaction.
All these regulatory changes demand more transparency of all processes related to product development and management, including a broad range of support activities such as customer advice, responsiveness, complaints handling and post-sales tracking of product performance and suitability.
This will put significant pressure on financial services providers to change internal processes and systems, and implement stricter controls on product development, selling and distribution. It will also force them to adopt more effective risk management strategies that oversee product risk and suitability.
All these challenges will make meeting regulatory standards a top priority not only for the compliance department, but also for the whole bank, involving all staff with the development, marketing, selling or servicing of products.
However, the question remains of how banks can ensure compliance with the latest regulatory requirements without disrupting internal processes and systems and incurring intolerable costs?
As banks need to manage complex global KYC requirements that extend to suitability and are geography, customer, risk and product-specific, they need to enable agility in changing risk ratings and streamline KYC and suitability processes to ensure compliance with global and regional requirements.
Unfortunately, the traditional, fragmented approach to compliance management is no longer sustainable. Banks need to introduce new compliance requirements across all operational layers and align the IT infrastructure with business objectives. Handling each piece of legislation separately by adding patches to the existing architecture is very expensive and makes the IT infrastructure even more complex and unwieldy.
The new capital and liquidity demands within Basel III and Solvency II are already putting financial pressure on banks to achieve real-time performance and risk management in order to minimise the risk and cost of managing liquidity and solvency. This will create a greater need for process efficiencies, better portfolio management and the consolidation of IT.
The financial services industry and its regulators continue to identify that implementing rules and process based technology is a key component of a robust program. Training and re-training sales, operations and compliance personnel will prove to be an operational burden and costly.
Therefore, financial services providers need to adopt a much more rules and process-centric approach to tackling compliance issues that provide the needed tools to align regulatory mandates with business objectives. This approach requires building complex compliance processes and rules into a repeatable, measurable framework that enforces corporate policies and controls, while managing day-to-day processes in a controlled manner. Banks can even go a step further by extending their use of technology to non-compliance areas. By matching compliance and non-compliance functions in one common platform, banks can meet both regulatory standards and increase revenue.
Incorporating rules-based compliance requirements such as KYC and suitability and affordability into the sales and on-boarding process will not only ensure full compliance based on risk type and customer profile, but will also improve on-boarding time, cross-sell and up-sell opportunities, resulting in increased revenue. Linking compliance practices with sales and operations in a centrally managed platform will enable the rules system to align all available customer information with internal policies. It should also provide recommendations on appropriate products as part of the sales process. This creates a single, unified environment for managing both business process and business rules, so these critical functions are never out of synch and are of course fully auditable. It also provides the much-needed transparency for regulators, while improving productivity and reducing costs.
Another great advantage of this process-centric approach is that it enables agility by allowing banks to re-use business policies and procedures and add ‘specialised’ layers of rules to implement new regulations, new products or business practices in a controlled environment. Using Business Process Management (BPM) solutions, banks can specialise how their processes, decision rules and data sources will work, thus aligning compliance practices with business goals and achieving full control and auditability.
As financial services providers have to comply with regulatory requirements across different geographies, products and lines of business, the BPM engine determines which processes, rules and data sources apply best in every situation based on the institutions specific business model. Furthermore, the system is intuitive and constantly ‘assesses’ each situation and customer interaction to define the next best action. This provides great personalisation of the service and the flexibility to tailor each offering/service to customer needs. It also provides a 360 degree view of the clients’ risks and portfolio. BPM technology ensures full auditability and control.
By automating compliance policies, rules and best business practices banks will be able to re-use and adapt existing processes, extending into new products, departments and geographies at minimum cost and at the same time accelerating compliance. In addition as product and customer risk change, financial institutions can manage these changes to risk in days vs months.
This will help financial services providers gain competitive edge and drive operational efficiency and customer satisfaction, while meeting the highest compliance standards in an ever-evolving regulatory landscape.