Author: Suranjan Som, Senior Risk Architect and Joint Head BI at IMGROUP
From the first big accounting regulations of the early 2000s, there has been no let up in the introduction of new regulations both in the UK and the US. Whether it’s FATCA, Basel III, SEPA or a number of others, financial institutions across the board are currently investing a substantial amount of time and money on ensuring their risk management processes are up-to-scratch and therefore compliant.
It is because of this required investment, that professionals within the finance industry may see increasing regulation as a negative trend. With 74 total rules out for comment by regulators in the US alone in 2014 (as opposed to 28 in total in 2007), the recent onslaught of regulation is forcing banks to be more focussed on effective data management, to help ensure compliance.
Despite the negative connotations however, risk is not all negative. Financial institutions shouldn’t be looking to eliminate risk, but rather understand and manage it better, in order to have foresight into what could potentially happen in the future, and make decisions based on these scenarios.
Where is the risk?
There are three major types of risk that financial institutions are using data management for:
- Operational risk – risk which comes from running a business across different offices, geographies, etc.
- Trading risk – risk from market fluctuations, affected by macroeconomic issues, interest rates, etc.
- Reputational risk – banks have to be careful with what they reveal in the media and especially with social media as this can be used against them
Part of the reason for this negativity is the financial outlay associated with each new regulation. However, a large financial outlay on new data management processes is actually not necessary with every new regulation. Instead, financial institutions should be looking at making a greater financial investment in their systems and process now, to reduce the long-term costs associated with regulatory compliance.
The business benefits of using data for risk management
Risk is not necessarily a bad thing – as most people would have you believe. Risk is basically a measure of uncertainty of outcomes. The higher the risk you are able to handle, the higher the returns.
The insights that effective data analysis can deliver for risk management purposes will enable banks to make better informed strategic and investment decisions and help communication across departments. The bottom line is that the more a financial institution knows about the risks within its business, the better position it is in to act and make decisions which can mitigate them.
In the short-term, this will help banks avoid making losses on trades and investments, subsequently increasing returns and profits. It will also help ensure that they are complying with the various regulations and avoid fines and penalties from the regulators – in many cases compliance will be the original motivation for investment in data management anyway.
In the long-term this will also lead to significant cost savings for the business as an integrated approach will ensure no duplication of data. Most importantly, if a financial institution has a comprehensive understanding of the risks it faces, it can then use its capital in a much more effective way and increase efficiency and profits as a result.
Positive customer impact
Aside from benefits to the day-to-day running and efficiency of a financial institution, effective data management for risk purposes can also help realise benefits for both retail and investment banking customers. Much like the regulators, these customers are demanding transparency and better risk management of their assets.
When it comes to retail banking, effective data management in response to these regulations, such as FINREP, COREP and Basel III, will allow banks to be more transparent about how customers’ (that is the publics’) money is invested within the organisation. While high street banks are not answerable directly to retail customers, the regulators act as a proxy for the public to ensure that their hard earned savings don’t go down the drain.
For private wealth clients this enables banks to be able to report more clearly and in more detail on where their money has been invested. When it comes to investment banking the principles are the same – capturing and managing data allows investment banks to be more transparent and report back to their clients (in this case other banks or financial institutions) on their investments.
Overcoming the obstacles
Currently most financial institutions manage regulations on a project by project basis. However, many of the regulations overlap in terms of the data they require to be reported. The regulations all demand greater transparency and accuracy, meaning that raw data is required to be captured at the lowest grain. If financial institutions undertake data management strategically, rather than individually, and implement an integrated risk management system, they could deal with each new request as part of an overall programme that will add value to the business and its customers.
Success in business is all about gaining competitive advantage, whatever the industry. In financial services it will be the organisations that aren’t afraid to be innovative and choose to fully embrace the proper use of data, who will be the industry leaders of the future. Putting in place an effective data strategy is vital in order to harness the huge volumes of data within the business, and this is crucial for risk management, compliance and realising a number of business benefits.