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For financial services, compliance is as inevitable as death and
taxes. But with compliance costs spiraling amid intensifying
competition, banks are finding themselves increasingly
squeezed.
Back in 2018, a survey of US banks by the Risk Management
Association found that half of respondents were spending between
6‑10% of revenues on compliance. And both banks and their
customers are paying the price: According to the survey, these
higher compliance costs resulted in less flexibility in designing
products and higher product costs.
This situation has only intensified since then. Post-2018, the
third phase of the EU's Securities Financing Transactions
Regulation (SFTR) went live, the second Payment Services Directive
(PSD2) was effected and the Sustainable Finance Disclosure
Regulation (SFDR) is being phased in. Meanwhile, LIBOR is being
phased out.
The regulatory trend is clear. The only question then
becomes—how can banks effectively and efficiently navigate the
shifting compliance landscape? These four best practices can help
banks enhance the efficiency and effectiveness of their next
compliance project.
1. Prioritize the customer experience
The banking industry often talks about customer experience in a
front-end, customer-facing context. They discuss user journeys,
nurturing relationships and delivering on expectations. But what
about back-end activities such as compliance?
Take SFTR reporting requirements as an example. To ensure
success, banks must elicit responses from numerous counterparties.
But are they making it easy for them to answer those queries? And
are they taking into account the number of times these
counterparties are being asked for the exact same information by
dozens of banks? For many customers, the experience is exhausting
and overwhelming, a situation that some banks are choosing to
address by establishing consortiums to standardize and streamline
these requests.
Context is another consideration at a time when back-office
communications are not designed to deliver the contextual and
personalized experience that the front office has perfected. For
example, financial services counterparties and corporate
counterparties often need to be handled differently. To boost
response rates, you may need to provide more context to the latter
on why it is important they respond to your queries. That is
customer education—another crucial part of the customer
experience.
2. Explore collaborative models
Competition in financial services is getting increasingly heated
as technology allows new entrants to stream in from previously
unrelated sectors. But competition does not preclude
collaboration—especially when it comes to compliance, which
affects every participant. After all, adherence to regulations is
not a competitive advantage, which means that there is no downside
to sharing this information with peers.
Instead, the industry may well benefit from a more collaborative
model that enables all participants to collectively achieve better
and more efficient compliance outcomes.
Standardizing the approach and utilizing a centralized
environment for accessing and providing all the relevant documents
creates significant economies of scale, enabling these banks to
minimize costs while boosting response rates and improving client
relations.
This is unfamiliar territory for many, but the early outcomes
suggest strongly that the benefits are worth exploring. As a first
step, banks need to take a more proactive stance—engaging with
their peers through industry networks and forums, for example. They
also need to look for ways to standardize compliance requirements:
the greater the standardization, the more effective the
collaboration.
3. Challenge legacy thinking
For many banks, the way forward is often constrained by the
past. In other words, problems are solved in a certain way because
"it's how it's always been done" rather than as a result of a cost
and risk analysis.
Proper due diligence can help challenge assumptions and reveal a
better way forward. Factors such as a project's strategic need,
necessary scale and required technology should be deeply studied
before embarking on it. This is especially true when the project
involves issues of scale. Obtaining 100 different counterparty
responses is a very different proposition than obtaining 10,000,
even if the nature of the responses is similar.
Begin with the primary consideration—whether to handle the
project internally or outsource it. A few questions to ask:
How much capacity do my internal teams have?
Would taking on this additional project divert these teams from
other, higher-priority work?
How can I measure success and progress for this project?
What would be the costs to hit those success metrics?
How would these internal costs compare to outsourcing?
The answers to these questions will vary depending on not only
the project objectives and availability of internal resources but
also the nature of the project. For example, a long-term project
with stable workflows is very different from a shorter-term one
with fluctuating workflows.
4. Evaluate service partners carefully
For banks that decide to rely on outsourcing to undertake a
compliance project, the choice of partner requires careful
consideration. Beyond reputation, references and a proven track
record, banks should look at these key areas for clues to the true
capabilities of the outsourced compliance service provider.
Education models: How much training would you
have to provide the outsourcing partner for them to be able be
fully onboard and ready to go? What types of training are staff
required to undertake, and with what frequency is that training
refreshed?
Staff retention: How good is the service
provider at retaining their own staff? High turnover can force
banks to deal with constantly changing personnel over the project's
duration, which might impact communications and productivity.
Business model: What resources does the
provider rely on to deliver the service? Are they an intermediary
that subcontracts to other companies, or do they handle everything
in-house? Subcontracting relationships can result in a lack of
accountability and service degradation.
Value-adds: What additional capabilities does
the service provider offer? Look closely at the technologies that
support service delivery, especially those that enable counterparty
communication at scale. Intuitive project tracking tools are
another example.
Industry leadership: Is the service provider
taking an active industry role? How do they stay plugged in to
regulatory developments and operational realities in banking? How
have they demonstrated innovation and leadership in these
areas?
Keeping pace as regulatory change accelerates
There is a regulatory race going on. However, it is not being
run between individual banks but between the banks and the
regulators. The longer banks wait to act, the farther behind they
will fall—and the harder (and more expensive) it will be to
catch up. By rethinking key considerations such as the customer
experience and service delivery models, the banking industry can
find new ways to keep pace.
Posted 22 June 2021 by Marjorie Chee, Global Head of Managed Services, Regulatory Compliance, IHS Markit
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
