At the beginning of the year Deloitte provided their outlook for financial markets regulation and set out the top 10 key areas where they expect progress in the regulatory agenda in 2015. In the report Deloitte says that 2015 has the potential to be a turning point for the post-crisis regulatory agenda and firms could move away from repairing balance sheets and reputations to implementing regulations agreed over the last few years.
So, how are banks getting on – are they on track to meet regulatory demands and deadlines this year or is 2015 becoming another challenging year of ongoing financial reform regulation that feels more like one step forward, two steps backwards? With insights from Zhiwei Jiang, Global Head of Insights and Data for Capgemini Financial Services, Chris Probert, Managing Principal, Capco and Dulcima Browning and Laure Alonso, both Senior Consultants at Capco, bobsguide finds out how banks are shaping up so far.
Structural reform and resolution in the financial sector
Deloitte said that banks will be required to ring-fence some of their activities in 2015. Meeting authorities’ expectations of resolvability and progress on restructuring will also be important this year.
According to Zhiwei Jiang, Global Head of Insights & Data for Capgemini Financial Services, banks are currently re-examining their strategies and are cutting high cost operations. “In general, the banks are facing massive regulatory challenges and ever-expanding regulatory requirements. At the highest level, banks are re-examining their overall strategy, including what business to keep or trim and what regions to operate from. Already, a number of capital-intensive businesses, such as commodities and a number of high cost operations such as IT infrastructures have been cut.”
Jiang also said that banks have changed their approach to spending and are spending more money from their Change the Bank (CTB) budget on regulatory changes, rather than on changes to increase bank revenue. “Banks are also spending an increasing share of their overall IT budget on regulatory changes, for example half of CTB budget can go to regulatory changes, not for revenue-generating business.”
Data and regulatory reporting
According to Deloitte, there are a number of initiates that will make data and reporting critical for banks in the year ahead. The report says that firms need to take a more fundamental and strategic approach in the medium term rather than adopt tactical solutions due to short term time and cost pressures.
Chris Probert, Managing Principal, Capco believes that banks have taken large strides to become more strategic in their data aggregation capabilities so far this year. He says that, “Firstly, the complex and disjointed governance/ownership structures are being cleaned up and replaced by a more cohesive overarching data governance and strategy. This allows banks to set common standards and controls, and more importantly manage changes to data in a much more effective way. This in turn allows for effective aggregation without the worry that data has changed without the consumer knowing. This common governance structure is also a precursor to bigger strategic thinking on banks’ data architecture; often through the development of data warehouses or lakes.” However, according to Probert, “there is still a lot of room for improvement in banks architecture which often have multiple systems which perform the same function.”
Authorities also expect banks to be building upon their capabilities to meet Basel III requirements. According to Dulcima Browning and Laure Alonso, Senior Consultants at Capco, banks have been reducing unnecessary costs, investing in projects to enhance process capabilities and improving data quality over the last three years. “Tight implementation deadlines have challenged banks to react quickly to comply with the strict capital, liquidity and increased disclosure requirements imposed by Basel III. Banks have invested in short term remediation projects - increasing complexity across systems, processes and architecture and resulting in operational risk.”
“Since 2012 banks have divested unwanted bank assets, particularly in fixed income, to drive down capital costs and increase return on equity. In 2013, banks began to review business strategy and transition from reactive compliance to proactive leveraging of new regulations to improve data quality and process efficiency. 2014 to 2015 has seen significant functional and organisational transformation, and integration across Finance, Risk and Treasury capabilities through large scale target operating model programmes,” Browning and Alonso said.
Culture and treatment of customers
Deloitte lists culture and the treatment of customers at the forefront of what regulators want to see this year and say that although everyone in financial services can now “talk” culture, the challenge is for them to “do” culture.
The UK Banking Standards Review Council will also begin its operations this year and has said that measuring improvements in banks’ cultures and consumer outcomes is high on its agenda. The line-up for the board was announced in April and it has 14 members in total, made up of 9 non-practitioners, including its Chief Executive, Dame Colette Bowe and 5 practitioners from across the whole UK banking sector. Bowe has already publically said that the banking industry must raise its game. “Banks recognise the urgent need to raise their game and build the necessary momentum for change. It won’t happen overnight and it will be an uncomfortable journey but the time has come to win back trust.”
Jiang says that at the moment, “compared to other industries, banks are way behind on their customer-focused culture. While every sales team will claim to be customer-centric, and more and more banks are rolling out CRM applications, most banks lack an overall customer-centric strategy.” He also believes that new challenger banks are more customer-centric. “The interesting thing is that more start-up financial institutions have become customer-centric. They are generally nimbler and more willing to adopt innovative technologies such as Big Data Analytics to help drive the experience today’s consumers are demanding.”
Competition and innovation
Since April 2015 both the Financial Conduct Authority (FCA) and Competition and Markets Authority (CMA) have been the UK’s competition regulators for financial services. The regulators have both been reviewing competition in the financial sector and in particular the treatment of challenger banks.
According to Jiang banks have been asking themselves how they can innovate without over-spending and motivate staff. “Banks are asking themselves, how do we innovate while we have to spend half of our CTB budget to meet regulatory demands, and how do we keep our best-minded staff motivated in this competitive environment?”
Jiang says that many banks are still scratching their heads and haven’t made much improvement in the areas of sales and trading. “In the sales and trading world, given the regulatory scrutiny, there has been very little product innovation after the credit bubble burst in 2007/2008. This is an area with much room for improvement that banks need to look into to keep up with competition.”
According to Bruno Cambounet, VP Finance Services and Insurance industries Program Leader, Axway, the digital age and the rapid growth of mobile payments is forcing banks to find more flexible ways of managing their data processes, such as applications. However, John Rakowski, Solutions Evangelist at AppDynamics, thinks that news of high-profile online banking glitches such as the recent RBS and NatWest mobile app failure are causing consumers to lose confidence in their banks and turn to new challengers.
Stress testing and risk management
In 2015 Deloitte said that stress testing will continue to develop in the UK, Eurozone and US and will become an increasingly important supervisory tool. Cross-border coordination will also become more important once authorities better understand the role the tests play in their jurisdictions.
Probert believes that this year “banks have taken large strides to be more strategic in their data aggregation capabilities.” He also says that, “the complex and disjointed governance/ownership structures are being cleaned up and replaced by a more cohesive overarching data governance and strategy.”
According to Probert, this allows banks to set common standards and controls, and more importantly manage changes to data in a much more effective way. This in turn allows for effective aggregation without the worry that data has changed without the consumer knowing. This common governance structure is also a precursor to bigger strategic thinking on banks’ data architecture; often through the development of data warehouses or lakes. However, he also says that “there is still a lot of room for improvement in banks architecture which often have multiple systems which perform the same function.”
Deloitte said that global systemically important banks (G-SIBs) will face a challenge to meet the BCBS 239 January 2016 deadline to achieve its data and risk aggregation capabilities set out in its international principles.
Probert says that the BCBS 2016 deadline “was always going to be difficult considering the challenge in implementing large scale architecture changes. With that in mind, banks have been targeting a tactical version of compliance for ‘day one’, with further effort required to be strategically compliant. This tactical compliance is being achieved by the careful scoping of the risks and metrics which are to be included for day one; the reorganization of change teams so as to include BCBS 239 requirement in ongoing projects and with a focused approach on ensuring that their control framework/MI are light weight but effective.”
Post-January 2016, Probert says there will be significant work for firms to rationalise their IT platforms to be strategically compliant, especially in relation to their need to have the capability to be adaptive to changes in the risk environment.
According to Jiang, BCBS 239 has the most comprehensive data and risk requirements and in order for a Tier-1 bank to implement this fully at an enterprise level, it would have to spend more than $1 billion to be fully compliant. Jiang says that, “most major banks will have already done enough in terms of patching to meet the requirements, but they are running the risk of doing so at a minimum and not having the right solutions, or the most strategic ones.” However, banks’ ability to adapt to strict regulatory guidelines depends a lot on their ability to read between the lines and work closely with vendors and even new entrants to develop solutions to help institutions comply in the years ahead.