TEMPERING THE GROWING COST OF COMPLIANCE

Q&A with Strevus’s Chief Executive Officer on How Small to Medium-Sized Financial Institutions Can Temper the Growing Cost of Compliance

With an increasing number of compliance initiatives, small to medium-sized firms can no longer keep up with manual-based processes.  I discussed the issues surrounding compliance with Ken Hoang, chief executive officer and co-founder of Strevus, Inc.

How does Strevus’s platform support compliance?

Ken Hoang

Ken Hoang

Strevus facilitates the streamlined, secure exchange of regulatory data and documents between trading counterparties. Through a private, hosted exchange network, financial institutions are able to confidently automate data requests that have largely been managed and tracked manually, and provide their clients with a self-service portal to respond.

With configurable business rules, the solution enables institutions to automatically send tailored, regulation-specific requests for information to targeted sets of counterparties. Validation rules then run checks to ensure the required information is submitted in the required format which eliminates the need for manual review and follow up.

Further, our solution embeds regulatory compliance and data management expertise into workable solutions and methodologies.  These align financial institutions’ internal legal, tax and compliance policies/expertise and external advisor recommendations to ensure fast and predictable compliance.

What issues are driving the need for compliance? And are these global or regional issues?

In many settings, financial institutions continue to maintain paper-based systems for complying with government regulations. This continued use of paper documents is slow, costly, cumbersome and error prone.  Not only does the status quo stifle efficiency within these financial institutions, but repeatedly asking clients for the same information via paper-based methods is damaging the customer experience.

Small to medium-sized institutions are quickly following the lead of the larger institutions by adopting electronic-based compliance processes and systems.  Moving compliance online with the use of electronic filings is inordinately more efficient, cost effective and secure, and offers economies of scale previously unavailable in the industry.

Take the Foreign Account Tax Compliance Act (FATCA) for example.  Enacted in 2010 by the Unites States Congress, the pending law is designed to target noncompliance by U.S. citizens of tax obligations using foreign accounts in aneffort to crack down on tax evasion and reduce the tax gap. Since that time, FATCA has gained broad support among international partners, including many of the world’s largest financial centers, and is poised for a strong start.  Recently, the FATCA law was revised to allow for electronic W8s.  This is a step in the right direction for electronic filings as now it’s equally important that financial institutionsof all sizes follow suit; first by using electronic W8s instead of paper forms for FATCA compliance,as well as extending electronic-based compliance (whenever possible) to all compliance documents and regulations moving forward.

Okay, we discussed the need for electronic delivery, but what other challenges do small to medium-sized financial institutions face today?

No matter what the initiative or compliance challenge, clients are tired of the multiple requests for information and perceived lack of communication among departments.  Whether due to disconnected communication or a tarnished reputation following regulatory sanctions, clients will move their business to an institution that makes it easier and is considered more trustworthy.

Know Your Customer (KYC) is one such example. KYC compliance requires rigorous controls covering a broad spectrum of customer due diligence activities; from identity verification to ongoing monitoring and demarketing decisions.

Small to medium-sized financial institutions are struggling to keep up with their larger counterparts due to limited budgets, lower headcount and inadequate infrastructure,which is needed to efficiently collect, monitor and maintain up-to-date, proprietary information from clients.

You mentioned that the cost of maintaining compliance is a huge concern for smaller institutions. What are the most common reasons for these increasing costs?

Let’s face it, mandatory regulatory compliance is a real distraction from any financial institution’s core business.  However, the challenge is even greater for smaller firms.  Recognizing the costs and complexity associated with compliance, small to medium-sized organizations are looking for solutions that can encompass a wide range of regulations as opposed to larger firms that prefer to adopt point solutions targeted at one specific regulation such as KYC.  Today, firms are taking a hard look at the costs of compliance and are recognizing that these costs are growing exponentially because of three key factors.

First, they are faced with constantly shifting regulations. In the last 13 years, rapid regulatory changes and the introduction of new rules have required that financial institutions constantly refine – and in some cases – overhaul their policies, training and systems.  Once they catch up, they’re hit with more changes, creating enormous and constant churn.

Second, they must adhere to even more stringent regulations, enforcements and, if they fail to comply; penalties. Financial institutions of all sizes are feeling the pain of greater oversight with constant auditing, testing and validating of processes from internal and external groups.  As enforcement becomes more hands on, institutions need to invest more in infrastructure to effectively corroborate regulators’ demands.  After all, a single bad transaction may lead to a hornet’s nest of issues.

Lastly, they face the loss of opportunity. Complex due diligence processes can be a competitive disadvantage, negatively impacting the quality of client relationships and revenue opportunities.  Delayed on boarding means it takes longer to transact, and even longer to get to revenue – weeks later instead of days.

Technology seems to be a key advantage to gaining control over compliance, but what should small to mid-sized institutions look for to ensure the solution can tackle compliance issues today as well as those that undoubtedly will come In the future?

In order to cost-effectively manage due diligence and speed up both time-to-compliance and time-to-revenue, the industry needs to evolve infrastructures and business processes.  Small to medium-sized financial institutions need a solution that makes it easy for them to securely collect, validate and report compliance information between counterparties, clients and agencies.

A future proof solution for small and medium-sized institutions will automatically adjust business rules and policies to comply with, and quickly support, new and changing regulatory requirements. This minimizes the need for heavy legal tracking and IT involvement, and will also eliminate the need for a complete overhaul; thereby, reducing costs.

Future mandates and the increasing popularity of Bitcoin and other cryptocurrencies will also drive the need for additional compliance.  Institutions should prepare for these new and upcoming issues by looking for a solution that is capable of providing enterprise-quality regulatory coverage, scalability and security so they can maintain full compliance with existing KYC, AML, and Patriot Act requirements.

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