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By James Phillips is Regulatory Strategy Director, Lombard Risk

The financial services industry has undergone a mountain of reform since 2008, ranging from structural change to Basel III. We’ve witnessed bank business model changes and an increase in the amount of capital reserves and liquidity. Now that Basel III is largely in place, is the avalanche over?

It’s unlikely we’ve dug ourselves out just yet. More changes to regulatory requirements are coming down the pipe now that the legislative framework looks beyond Basel III. It’ll be different in nature; what it means to be regulated at the moment now follows what have become predictable lines, with stringent ratios, a mass of reporting to illustrate adherence to calculations, and of course more supervisory muscle. The latter has shown up in changes to the roles and liabilities of directors, and more recently of new language – “I attest that this report is true” has new meaning now.

As we move now towards a new peak, we can expect firms to:

  • move from tactical responses to regulation to a strategic approach
  • work with the tools they use to be compliant to deliver additional business benefit, and hence gain a competitive edge
  • undergo a shift in attitude towards data: data quality and confidence have been blocking issues, yet they can be an enabling force for positive change
  • crystallise the business case for building a responsive, agile, change-friendly operating environment
  • move to exception-based processing to meet regulatory obligations.

The regulatory landscape

Evolving regulations are mandatory and they drive requirements. To start with, there is the rest of Basel III, or Basel IV as some will call it. Firms must take action on these right now for January 2017 for the Standardised Approach to Counterparty Credit Risk (SA-CCR) and the Standardised Approach to Central Counterparty exposures (SA-CCP). These are the two core changes to credit risk which already challenge the data quality and granularity firms need.

There are more over the medium term, in particular FRTB (Fundamental Review of the Trading Book) and its impact on market risk. As internal models are side-lined, finer-tuned standardised approaches take their place and firms have ongoing work to do to re-engineer their processes related to these risks.

Finally, firms need to plan around data reporting, as already witnessed with transaction reporting demanded by Dodd Frank and EMIR. The US Federal Reserve has been collecting granular data for capital adequacy purposes for the past four years, and has now added granular cash flow data with the implementation of LCR (Liquidity Coverage Ratio requirement). In Europe, following an XBRL data model, vast quantities of data have already been gathered as well. With incoming regulations such as AnaCredit, reform of Money Market Statistical Reporting requirements (MMSR), MiFID/R and new requirements under the Securities Financing Transaction Regulation (SFTR) the march to detailed data reporting has no end.

From tactical to strategic

The pace of regulatory change is not slowing down; firms cannot just keep adding people, localised processes and more automation at the level of the business unit. They need to look at the bigger picture and explore strategic ways to model the operational side of their business to reduce costs and improve on how they hold and report data.

There are specific areas where firms can make material savings, for example in preparing and managing data, information transformation, meeting regulatory data labelling requirements and internal approvals and workflow. To compete, firms need to look at all areas where costs can be reduced, regulatory risks can be managed, and operational efficiencies can be increased. In doing so, they can achieve a competitive advantage and ensure a better position with regulators, whilst dealing with costs and achieving scalability.

Gaining competitive advantage

To be regulated well and to benefit from it confers a competitive advantage. By effectively reusing regulatory data and being positively informed about trends, firms can gain a competitive advantage. Senior management, without the distraction of audit interventions, Matters Requiring Attention or other costly remediation actions can be proactive.

The faster and more efficiently firms move from a tactical to a strategic response to regulation, the better their competitive position will be. This means going upstream to ensure data quality and availability, having confidence in the accuracy of information flowing through the firm and to the regulator, and human intervention by exception-only. Firms need to support the straight through flow of ‘clean’ data to regulators, which will allow them to manage their time more effectively, instead of worrying about the next report. This end game crystallises the business case for building an agile, future-proof operating environment with exception-based processes as a central goal.