Said Tabet, governance risk and compliance expert from EMC argues that financial services and insurance companies need end-to-end visibility of their business processes to comply with regulation, restore trust and secure competitive advantage
The economic crisis, borne in part from a lack of monitoring and financial controls, forced the Financial Services and Insurance (FSI) sector to review and overhaul the regulatory standards in place. Previous attempts, including Basel II, did not succeed in delivering the level of visibility and understanding of data FSI organisations needed, which led in turn to a lack of understanding of bad debt and risk exposure, resulting in a breakdown of trust and a slow-down in lending. These failures led to the creation of Basel III, an updated and strengthened regulatory regime which came into effect on the 1st January 2013 with a transition period running until 2021, aimed at finally eliminating this issue. As well as the latest iteration of the Basel Accord, the new Capital Requirements Directive (CRD) and the eXtensible Business Reporting Language (XBRL) represent a new attempt to overhaul the reporting structure for which FSI organisations have to comply in order to not only head off future crisis, but stimulate lending.
Despite the introduction of these new rules, a new study from Quocirca and EMC of 100 C-level finance executives across Europe reports that 31 per cent are yet to understand the impact of the newly mandated XBRL on their organisation. Furthermore, 48 per cent stated that the changes required to meet the requirements for CRD either didn’t bear thinking about or would involve major changes to their existing systems. It’s therefore unlikely that organisations are ready for the regulatory changes, required by law, and which are vital for the health of the industry as well as the wider economy.
With data growing exponentially, FSI businesses need to improve their internal processes to better understand the ‘big data’ sets in order to allow the monitoring of risk exposure in real-time. Only once this has been established will FSI organisations regain confidence and get lending moving again. Although it may be self-evident that something needs to shift to improve the situation, enforcing these regulations within the FSI sector is complex, and many remain sceptical of the benefits to their own organisations.
Beyond compliance: the value of data analytics in delivering competitive advantage
Big data is now one of the top issues for all financial and insurance institutions. The FSI sector arguably generates and consumes more data than any other. When the billions of financial transactions that take place in these organisations on a daily basis are taken into account, having a limited view of, or losing control of just a fraction of that data could cost billions, in loss of business, possible fines and reputational damage. But Big Data provides many opportunities too. FSIs can gain better insights and intelligence about their company, and, with the correct tools in place, can efficiently analyse and extract insights that drive new revenue opportunities, as well as reducing the cost and time associated with regulatory compliance.
The combination of Basel III and Solvency II are generally regarded as the correct course of action by most professionals in the industry – banks simply can’t go back to business as usual. Fifty- four per cent of those surveyed in the Quocirca study felt that further regulation would have a positive impact for the markets as a whole. Worryingly however, firms do not seem ready or possibly don’t have the know-how to comply: only fifty-two per cent admitted that they had, at best, only the basics in place.
If organisations are going to comply with these regulations, more needs be done to educate them on the benefits of increased visibility of their data and the insights beyond compliance – for example, how it will improve trading and the potential returns on lending. XBRL is not just a reporting standard, it is a way to enable agile communication across silos and between financial institutions and their partners and to use market data and other key information to support effective decision making. These new sophisticated risk management solutions will deliver better insight, crucial to understanding the level of bad debt within the organisations and the market as a whole. These improvements also allow FSIs to provide better options for the public, matching the needs of customers more closely to products and improving portfolio and mortgage selections: companies that do this right could end up being more competitive and less exposed to risk than their rivals, and make headway in restoring public confidence in the FSI sector.
The Big Data opportunity
Firms are continually working to upgrade their information systems and redefine their business processes. This is not just about compliance, it’s about a new era of financial information management and business process innovation. However, the research from EMC and Quocirca raises some concerns about how ready financial institutions are to comply with the new regulations: there is still confusion in the market as to exactly what and how to implement these new standards
Organisations shouldn’t be fighting XBRL adoption but should instead use it for competitive gain. The ability to rapidly and accurately assess the level of good and bad debt should form a vital part of a bank’s business. The hope must be that – in time – this will restore public confidence in the financial services sector too.
More intelligent approaches to risk management enabled by big data analytics and agility through standards-based integration will support growth and push the boundaries of competitiveness further. By grasping this new level of agility using intelligent tools and systems, the FSI sector shouldn’t see the data or the regulation around it a problem, but as an opportunity to improve performance. It’s a tough time for the FSI sector, but getting to grips with data will deliver improved confidence, performance and competitive advantage.
About the Author: Dr. Said Tabet is leading the governance risk and compliance expert within the office of the CTO at EMC Corporation. He is also serving as the chair of technology standards at The Open Compliance and Ethics Group (OCEG), leading the GRC-XML Initiative.