Compliance resource drain holding back capital markets innovation

By Alex Hamilton | 11 December 2018

Firms “completely consumed” by solving regulatory projects are holding back proper back office innovation in capital markets, according to Alastair Rutherford senior advisor for Nomura Research Institute. Speaking at an industry event in London this week, he argued that when companies are tying up “key resources” on regulatory projects, they “shy away” from legacy infrastructure renovation.

That reticence is “all well and good,” he adds, but just “stacks risk up for the future” when there are still things that need to be dealt with in the short term: “One is cost, which we see people throwing robots at, but the other is having data in your legacy system which you actually need to make more accessible. You generally need to do something to get that into a more of an open environment.”

Joining Rutherford was Oliver Cooke, NatWest Markets’ head of trading. “From what I’ve seen, actually just getting the basics right improves the workflow automation,” he said. “There should be a big focus on getting the data right and getting it right first time, then shifting to processes. I think many of these technologies – blockchain, AI, machine learning – they’re for the future, really. It seems to me that so many back-office environments are so complex that sorting that out first is the way to go.”

According to a 2018 survey from SIFMA, 80% of capital markets firms are assessing the value of AI, machine learning and robotic process automation (RPA), while 39% of respondents are progressing to the proof of concept stage. 22% stated they had entered full production. In line with Cooke’s comments, the major concern for those surveyed by SIFMA was the standardisation and quality control of data, which 53% cited as a top priority

“We do see people who have gone down the route of building something quite flexible like APIs into their architecture,” stated Rutherford. “Our view is that there is still a massive risk stacked up in the core books and records systems across most of the industry that will at some point need to be addressed.”

Many firms have turned to robotic process automation (RPA) to assist with back office workflows. More than three-quarters of those responding to a 2017 Deloitte survey on RPA said that they expected to “significantly increase” investment in the area up until 2020. Among the RPA benefits expected by respondents were improved compliance (92%), improved productivity (86%) and cost reduction (59%).

A lot of organisations are putting “an awful lot of effort” into RPA, said Rutherford. “It may be the case that there are other investments around the AI, machine learning, and blockchain uses in the front office, but in the back we see lots of people frantically trying to reduce costs by implementing robots.”

It’s easy to see the rationale behind this, he continued, when you see how some departments are “completely consumed” with regulatory work. “You give the robots to those in the operations department, who say ‘excellent, off we go, this is simple scripting language’ and we get all sorts of things which look wonderful in a proof-of-concept but have typically gone very wrong when they’ve gone to implementation.”

The time for back office change is now, argued Rutherford. He gave the example of “quite a large German organisation” which had told him the average age of its support team covering the books and records was 57. Even with the bells and whistles of fintech innovation, he added, “there’s a real risk that we’re going to have key skills shortages, where legacy systems are not understood, not properly managed, and that will have a massive impact on the customer base.”

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