At Sibos this year, the standards forum will be encouraging discussions around some of the key challenges facing the FS industry such as compliance, regulation and automation. There are a number of sessions featured around these challenging areas such as 'The re-invention of regulation' and 'Market infrastructures update: ISO 20022 plans and visions'. In this feature, bobsguide explores what the industry is doing to keep up with the changing regulatory landscape and whether transparency is enough to protect against financial crime.
Regulators have been asking a lot from banks over the last few years and transparency is just one area where they want to see improvement. Back in May, bobsguide published a regulatory feature which looked into how banks are shaping up so far this year, in the key areas that regulators said they wanted to see an improvement in such as structural reform, data and regulatory reporting, treatment of customers, innovation and risk management. The feature highlighted that although banks are re-examining their strategies and re-structuring their operations, there is still a long way to go and more regulatory hurdles to face in the coming years.
According to The World Payments Report by Capgemini and RBS, through key regulatory and industry initiatives (KRIIs) introduced in previous years and in 2014, regulators expect to reduce risk, increase competition, and improve transparency and innovation, from now all the way through to 2020, which could prove to be particularity challenging for banks and payment processors.
The role of technology and keeping up with change
Globally, countries such as China are rapidly changing the financial industry, through the introduction of fast moving technology and regulatory reform. Could banks in other countries be learning anything from Chinese tech companies that are going global? This is a topic which is up for discussion at Sibos this year and a topic that Zennon Kapron, founder of Kapronsia believes is well worth talking about. "China is all about Big Fintech. As opposed to small upstarts that are slowly disrupting an industry, in China, it is the tech giants that are changing the way a billion people bank," Kapron told bobsguide.
To keep up with technological changes, many FS companies are investing in technology, and more are working more closely with third parties and vendors, who can often provide innovative technologies that can be installed alongside current infrastructures, and are also looking to start-ups for new ideas.
In our Sibos Topic 1 feature published earlier this week, Alan Laubsch commented on the current state of the FS landscape and said that many banks are investing in new technology to keep up with changes. “Goldman Sachs has more programmers than Facebook, and now rivals Silicon Valley’s biggest venture funds while also incubating start-ups internally. Barclays and Santander have started Fintech incubators, and most leading banks have ramped up investments. And we are seeing more co-opetition (e.g., Citibank partnering with Lending Club for community lending). Far from a zero sum game, Fintech innovators provide efficiencies and new markets for banks who learn to embrace innovation. And ultimately, firms must seek to disrupt themselves before someone else does,” said Laubsch.
But will all of this be enough? McKinsey released its global banking annual review earlier this week, which predicted that the digital disruption of the banking sector could wipe out nearly two-thirds of earnings on some financial products. According to Chris Mills, CTO EMEA, Pivotal, software development plays a vital role in giving customers exactly what they want. “Core to digital transformation is rapid software development that will help the traditional banks compete in the race to meet the needs of today’s digitally-led bankers. Development teams can no longer afford to take months to test new product and apps, they have to get to market fast before the competition takes a chunk out of their profits. This is where agile software development becomes critical, enabling teams to fail fast and reiterate the app build quickly so they can get it right and deliver financial products that today’s bankers actually need and want,” said Mills.
Transparency and financial crime
In his exclusive Q&A with bobsguide, Fabian Vandenreydt, head of markets management for Innotribe and The SWIFT Institute said that, “A lot of the energy and investment from financial institutions is going into financial crime compliance and compliance to regulation in general.”
Authorities expect banks to be building upon their capabilities to meet requirements set out in regulations such as BCBS 239 and Basel III, which aims to strenghten the transparency of banks through regular updates on liquidity and leverage. GT news reports that recent high adoption rates of Basel III from banks, highlights the benefits of the regulation from a liquidity, supervison and risk perspective, and banks will be required to update the Reserve Bank on real-time liquidity and leverage from January 2016.
According to other reports, the Basel Committee is considering making changes to the regulatory capital treatment and supervision of interest rate risk in the banking book (IRRBB) to help ensure that banks have enough capital to cover potential losses. The committee has presented two solutions to financial institutions: a standardised Pillar I approach which includes minimum capital requirements and an enhanced Pillar II approach which is all about market discipline and includes elements of Pillar III. Reports suggest that the Pillar II approach would create greater transparency and that financial institutions may prefer this approach, although under this approach banks would be subject to additional standards regarding supervisory reporting.
With many market infrastructures running or planning to run ISO 20022-based services, this standard is high on the agenda at Sibos and there are a number of sessions focused on the challenges, opportunities and benefits of ISO 20022.
How can ISO 20022 help to enable regulatory compliance? ISO 20022 is an ISO standard for electronic data interchange between financial institutions, which was introduced in 2014 and has since seen a fair amount of adoption, but now even more banks and authorities globally are considering ISO 20022 adoption.
There are issues with ISO 20022 adoption because different countries operate with different versions of the standard and if the industry does not agree upon an operational common standard then they will not be able to reap the benefits. In comparison to the current SWIFT FIN standards, ISO 20022 presents the opportunity for the industry to have a set of common definitions and has the ability to improve compliance driven processes, straight-through processing and simplify global business communication. At Sibos this year, SWIFT and the FS community will be attempting to align their efforts and come to an understanding about how to get the best from ISO 20022.
Many financial institutions want to know how they can better prevent financial crime and this looks set to be a topic up for discussion at Sibos this year, and in the years to come, but with the help of the bodies such as the International Securities Services Association’s Working Group, which was established in 2015 to review current transparency regulations and present the industry with measurable principles to follow, and industry events such as Sibos, the FS sector can gain more information about the tools and methods available to them to provide greater transparency.
Don’t miss Sibos Topic 3: Preparing for a cyber attack next week…