Risk management in banking has changed significantly over the past ten years, primarily because of the rules that came out of the global financial crisis and the fines that were given after it. But significant trends suggest risk management will change even more in the next ten years.
Three changes are significant for banks and how they work:
- The digital revolution is making a massive difference in the available data, how it is used, and how quickly decisions are made.
- Technological progress speeds up changes in how customers and competitors do business.
- Hyper-connectivity makes information flow faster and changes how people think and act.
The Landscape of Regulatory Compliance Today
A recent E&Y survey of 21 European banks found that most want to switch to a more effective model that uses technology. At the moment, though, traditional compliance practices are still the norm.
EY’s survey shows that, for the most part, banks’ compliance functions still follow conventional monitoring, surveillance, and advisory models, with a secondary split based on geography. Even though new products come into the market and a considerable rise in digital engagement has happened in the last few years, professional compliance staff are less likely to specialize in or be assigned to specific channels or products.
Problems FIs have to deal with
- Governments are constantly adding more rules about capital or amending existing regulations around the capital.
- High overhead costs for deploying solutions to meet these regulations. The penalties for rule violations are high.
- Constraints of legacy systems include not enough automation and digitization to keep up with the speed of regulatory changes.
- Last is the non-standardized approach, where systems don’t work well together because of sub-optimal systems integration.
Changes to rules in the financial sector are happening quickly worldwide. The sheer number of new regulations means financial institutions must deal with complexity and tight deadlines. Many FI’s have had trouble making the changes regulators have asked them to make.
In this context, RegTech has built a strong foundation within the ecosystem to help solve this problem and construct solutions for new and complex regulations and regulatory remediation. RegTech has also lowered the overall compliance cost for financial institutions (FI).
Turning Regulatory Compliance into Opportunity.
Financial institutions that get ahead of regulations and use them to drive organizational change, economy, efficiency, and effectiveness could gain a competitive edge that could help them grow or speed up. This is how:
Use the rules to create new ways to do business.
When figuring out how new rules will affect your business, they consider what might need to be cut back or stopped and what might now be allowed. For instance, understanding the implications better than competitors helps the company outperform through new products and ideas.
Focus on capital efficiency, not just on having enough capital.
Much regulation in recent years has been about ensuring FI’s set aside enough capital to prevent sudden failures or near-failures. Leading FIs seek methods for extracting higher value from the available non-regulatory amounts of money. One way is to stop doing activities that require much capital and instead focus on fee-based businesses (example: wealth management) that bring in stable, predictable income without burdening up scarce capital.
Make regulatory compliance a daily part of the business.
This step improves overall compliance and frees up resources so that it can be used to determine how new regulations will affect customers, products, and even business models and devise ways to deal with them before the rules go into effect.
Partner with regulators.
In countries like Canada, FI’s and regulators work well with joint degrees of respect. In such arrangements, where FIs share their knowledge and ideas about problem-solving, the regulators can help them find robust solutions. This partnership approach helps avoid cumbersome and expensive aspects of regulation altogether.
Look at the big picture. As the pain of the global financial crisis lessens, financial institutions shouldn’t hold their breath and hope that regulations will be eased. Shortly, governments and regulatory bodies will have a more prominent role in financial services, not a smaller one.
The best thing for FIs is to look at new rules as possible ways to get better, not as a burden to be carried. Talking to regulators proactively helps shape a joint beneficial agenda, which over time translates into business benefits and a competitive edge for FIs.