Henri Wajsblat, Head of Financial Services Solutions, Anaplan
Increasing regulation is just one thing we’ve inherited from the 2008 financial crisis. While it may seem like a growing paranoia within the industry, making sure the economy is better prepared for upcoming financial challenges is a vital step towards post-crisis reform. From 1 January 2019, the largest UK banks must separate core retail banking from investment banking: a move known as ringfencing.Well-known for having the most complex IT architectures, banks operate myriads of IT systems across the enterprise as well as within a single department. Proper management of these systems is key to the smooth running of any bank, or they risk losing control of sensitive customer information. The new regulation means that banks will have to make significant operational changes to help govern the shift, like hiring new management teams to own each arm.
This added silo will test the level of integration between teams, and make sure they are aligned on wider business objectives. But the laborious task of switching over sort codes and account numbers comes with challenges. It’s an enormously complex task to build, extract and construct the new infrastructure to hold these accounts – HSBC alone has already spent £400m on the process. With the UK’s exit from the EU also looming on the horizon, banks will be tasked with carefully managing resources to meet compliance deadlines.
Is ringfencing a risk?
Ringfencing creates a bold line of separation between the retail and investment entities and their respective management, staff, customer accounts and IT systems. While this is good news for banking customers, it has the potential to create added layers of complexity to an already elaborate system.
Banks will see a sharp increase in operating costs as UK banks are being challenged on their profit margins while at the same time trying to adjust to other new regulations from the international accounting standard IFRS9, to the General Data Protection Regulation (GDPR).
The split may drive higher cost of capital on the lending market as UK banks will be required to heavily capitalize their retail business. It is likely that Eurozone lenders will take advantage of this situation to increase their share in the UK corporate lending market. Meanwhile, banks such as Barclays and HSBC are having to fight harder to secure their foothold in the UK; they’ve both recently been placed under review for downgrade by Moody’s which was directly due to the impact of the ring-fencing legislation.
Since the regulation only applies in the UK, there is the danger that ringfencing may impact the competitiveness of local banks versus non-UK financial institutions operating with a universal model, boasting more integrated operations and governance across their divisions.
Finally, the changes will highlight how secure the process is. Banks need to make sure that customer data is completely secure throughout the process of transferring data across to different systems and databases. IT security threats are at an all-time high and if data is exposed at any point during the transfer it could have a potentially devastating impact on banks. Not only do banks risk losing customer trust, but they could also face millions of pounds in fines following the implementation of GDPR in May.
How can leaders ensure a smooth transition?
To secure a smooth transition, management teams will need thorough governance of the ringfencing process, both from a data and IT system perspective, involving data reconciliation and system testing activities. Bank directors will also need to look at the overall costs involved in implementing ringfencing. Finally, they may want to conduct intense scenario-based modelling and forecasting to align the bank’s ring-fencing programme with its corporate strategy and the regulator’s expectations.
How can connected planning help?
Connected planning enables banks to gather data from the various functions into a single platform for planning, forecasting and reporting. From a ringfencing perspective, the benefits of connected planning are two-fold.
Firstly, it eliminates silos across the bank, eases data reconciliations and makes it possible to disclose a single version of the truth to internal and external stakeholders. Any flaws in the data reconciliation processes during, before and after ringfencing, whether customer, finance, risk, operational or HR data, could generate reputational damages for the bank.
Secondly, as banks begin to ringfence their operations, leaders will need to be able to pull information and assumptions from all departments involved to manage the effectiveness of the project and prepare for the post-ringfencing situation. Relying on driver-based scenario planning and modelling capabilities will allow them to generate a number of scenarios and anticipate the business impact of each ahead of changing course.
Go beyond compliance with better decision making
The complexity of the constantly-evolving banking regulations puts bank leaders under considerable pressure to comply with the new requirements, adapt their data and systems in record time and anticipate the impact on their business. Ringfencing is just one example of the upcoming changes banks are faced with: IFRS9, stress tests, GDPR or Brexit are all testing banks abilities to cope with change.
To prepare, banks need to gather data from the past with forward-looking information to provide insights under different scenarios and assumptions. Connected planning will help banks navigate through these regulatory changes. By eliminating silos and combining past and forward-looking data banks can better prepare for potential scenarios and improve data reconciliation. Using a more joined up approach to planning will not only support compliance but will ultimately help banks drive better decisions.