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The future for the financial services industry will be a more regulated one



The future for the financial services industry will be a more regulated one 3

There is a storm brewing and a whirlwind of regulatory change in the financial services sector will soon take effect. US regulators have been particularly stringent on enforcing new legislation. Whether politically incited or not, British banks have been most affected. Since 2009, British banks (Barclays, Standard Chartered, HSBC and Lloyds) have been fined approximately £1.3 billion as a consequence of failing compliance standards. The future for the financial services industry will be a more regulated one 4

The truth is untreated risk can cost banks a substantial amount of revenue; it also damages their reputation and influence. As this storm continues to gather pace (yes, this is not the end of multi-million pound fines), there is a lot to be learnt from recent cases of malpractice:

Were these fines avoidable? In this period of economic uncertainty, bank shareholders and customers need assurance that their investments are profitable. Financial institutions therefore must inspire confidence from stakeholders while looking for sales growth. However, rigging national or international interbank borrowing rates to show an inaccurate view of the bank’s situation is illegal.

A bank was fined £290 million by a combination of UK and US regulators after confessing it colluded with other banks to fix the London Interbank Offered Rate. The regulators believe the root cause of this catastrophe was lack of supervision on the trading floor. The financial misconduct was open and widespread as employees were collaborating on fixing the rate via email and instant messaging. If there was a risk protocol in place at the bank, it was obviously ignored by staff.

This saga is by no means at an end as other banks will either be called up by regulators or confess their wrongdoings to avoid a heavier fine.
There was a blatant disregard towards the implications of fixing borrowing rates and the industry as a whole needs to move towards a culture of compliance. The CEO of the faltering bank stepped down amidst public pressure. He argued that he was unaware of the rate fixing, which begs the question is the board in touch with its organisation and did the CEO actually know who was actually accountable for tracking corporate risks?

Evidently, financial institutions must drive home the benefits of compliance and foster a culture of responsibility and accountability.

Global banks must be able to demonstrate transparency in adhering to local and international laws. In the past fortnight, the consequences of not being able to disprove allegations of corporate malpractice such as hiding thousands of transactions to what the regulator deemed as a “rogue state” has led to a £216 million fine. It has been coupled with the installation of an external monitor, who will assess the risk control process within the bank independently. The transactions were hidden from regulators by a technique called ‘wire stripping’. It involves stripping data which would have indentified the payee in the transaction. It would be hard to believe 60,000 secret transactions in question went undetected by the risk managers at the bank, let alone other employees. Were they scared of whistle blowing? Or were the transactions reported but slipped through the net?

Now, there is technology available, which drives the risk reporting procedure within banks. These solutions help risk managers oversee investigations and track the case to remediation. The software also provides management with employee-level accountability, providing banks with extra control for current and future regulatory demands.

Culture of compliance the only effective barrier for banks against the impact of regulatory flood
We have all seen the consequences of a barely-regulated one. You don’t need to look far ahead to see how new rulings such as Basel III and Solvency II will be implemented and their impact felt across the industry. So, tracking regulatory changes and disseminating intelligence about risks throughout the company is the main challenge to the bank. Banks can only move forward if they have effective processes to prevent a ‘risk-free’ culture from spiralling out of control.

In this ‘sink or swim’ time for banks and insurance firms, the examples above of financial misconduct should hopefully serve a lesson to the industry. Regulators are no longer blasé toward banking operations. There is much to do to engage employees with new policies and to ingrain a more risk adverse culture, stemming from the boardroom. Using technology to track risky actions such as employees avoiding management protocols or traders gambling on high-risk transactions is the only way to achieve regulatory compliance. Risk management solutions are vital in delivering the transparency and visibility necessary to promote regulatory compliance.

Successful risk management must balance the dynamics of people and technology. Compliance can only be achieved through active engagement of staff but requires a granular level that can only be maintained through technology. Social tools such as Salesforce Chatter empower staff to achieve this balance by starting conversations around compliance. Likewise, risk management and compliance can only thrive in as part of an integrated GRC approach.

For Xactium, a leading provider of Governance, Risk and Compliance software, the regulatory storm has offered a unique opportunity to challenge the preconception of traditional ‘one size fits all’ risk solutions. The company has been gaining popularity within the sector due to its customisable solutions, which provide banks with unprecedented flexibility.

John Mann, a UK MP and a member of the Treasury Select Committee, said on a UK national radio show recently: “We should catch up in financial regulation, if we do, it’s absolutely to London and Britain’s advantage.” Xactium demonstrates a counter argument which shows Britain is not behind but, in fact, is on the crest of the wave.

Find out how Xactium’s solutions can help corporations engage employees to comply with national and international regulations from their website.

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