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3 ways new regulation is impacting OpEx in the finance industry

Contributor: Craig Sharp
Posted: 09/02/2014
3 ways new regulation is impacting OpEx in the finance industry
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Following the financial crisis in 2008, world Governments scrambled to respond. In order to restore confidence in our financial markets, the media and public demanded a new model for the industry.

The resulting shifts in legislative requirements and expectations are already in full force, but the effects of the legislation have yet to be truly realised in many quarters. Of the international and regional regulations to step from the ruins of 2008, three in particular stand out as signifying a massive shift in operational ecxellence, and an unprecedented tightening of standards and quality.

1) Basel III means you WILL need a Big Data solution

Basel III is arguably the most written about financial regulation today. While the legislation itself has yet to come into effect, the Third Basel Accord is already the key focus of many financial organizations across the globe.

The requirements sound simple enough on paper: banks will be required to reach a minimum solvency ratio of 7% by 2019. Banks will need to comply with enhanced risk management and supervision requirements and finally they will also need to comply with an enhanced and expanded disclosure process. However one paragraph doesn’t really capture the enormity of the regulatory requirement.

For example, under the old system, most banks exceeded the Basel III requirement for 7% solvency. The solvency ratio (courtesy of the atply titled Basel III for dummies) is:

(Regulatory Capital) / (Risk Weighted Assets).

As mentioned, under the old system, despite the regulatory requirement being only 2%, the majority of banks exceeded this, usually by over 7%, due to most national authorities already requiring more. The problem is that with Basel III, the definitions of Regulatory Capital and Risk Weighted Assets (RWA) has changed.

This leaves banks with two choices to make up the estimated €600bn shortfall in their individual balance sheets, raise more capital or decrease lending. Either option requires a revised, streamlined process to see the kind of performance improvement required.

The increased regulatory requirements for risk management and disclosure should be quite self-explanatory – of course each will need far tighter and more efficient processes in place. The three pillars themselves all add up to one thing: banks will be generating and analysing more data than ever before – a properly considered big data procedure for banks is no longer a nice to have, it’s a must!

2) Solvency II means that Insurance firms will also need to invest in Big Data

Retail banks are not the only ones to come out of the financial crisis only to find themselves in the middle of a regulatory crisis. European legislation Solvency II, sometimes referred to as ‘Basel for insurers’ is incoming regulation designed to ensure the financial security of insurance companies in the wake of the financial crisis, create something of a legal obligation for firms to invest in data.

Like Basel III, the regulation comes with three main pillars or requirements. The first specifies quantative requirements for solvency capital, the second outlines qualitative assessments such as Own Risk and Solvency Assessment (ORSA), and the third established a regulatory requirement for reporting and public disclosure.

Unlike Basel III however, Solvency II has a much shorter deadline – the regulation is expected to come into effect on 1stJanuary 2016.

So why does Solvency II require investment in Big Data solutions? The legislation, among other things, demands far more stringent and detailed reporting than has previously been required of the insurance industry. The ability to accurately report and analyse big data sourced both internally from company records and externally for investments and securities will determine whether or not your firm is compliant, and strongly suggests that real-time reporting is the only solution, something which is only possible in most instances with heavy investment in new reporting and analytics technology.

If data or reports are inaccurate, not only do firms run the risk of setting aside too little capital, but they could also skew the other way – setting aside more capital than is necessary, negatively impacting their own profitability.

Another issue highlighted by the new regulations is the current fragmented state of internal data management and reporting systems and processes, and given that investment in the required technology updates is going to be costly, now might also be a good time to try and streamline and centralize the reporting and data gathering processes across the industry.

3) Ring-Fencing means you could need two executive boards, two management structures… two of everything!

Having received Royal Assent at the end of 2013, the Banking Reform Act is now law within the UK, one of the largest global financial centers. However the biggest outward change isn’t set to come until 2019 – the year that ring fencing becomes a reality in British banking.

While the public will have to wait a number of years to see this outward change, work is naturally underway within the industry, confused and confounded executives have been tasked with achieving a seemingly impossible goal – separating and protecting their retail banking operations from the choppier waters of investment banking.

This white paper isn’t looking at the question of whether or not ring-fencing is an appropriate measure however, we’re interested in the ramifications for your internal processes and procedures here. And while the ring-fence might steer high street savers away from the ‘choppy’ waters of investment banking, it also steers your business into the murky seas of uncertainty.

The Banking Reform Act has, as new legislation is wont to do, raised more questions than it has answered. The foremost question in executives minds will be: just how separate do my retail operations need to be from the rest of my business?

According to Out-Law.com, depending on your interpretation we could be looking at an extreme:

"Management and corporate governance structures are likely to attract much attention on the business pages of the press, with any hint of vested interest being severely punished. The board of directors of the parent should include individuals who are independent both of the ring-fenced body and the wider group, as well as non-executive directors."

As well as needing an entirely separate management body for your ring-fenced operations, you could also need an entirely new employment body for those employees that are part of the retail operation:

"Is there an employing entity for the whole bank? Given the requirement for independent operation it may be necessary to move employees for the ring-fenced body of the bank to a new employing entity and TUPE applies to a business transfer between two companies within a group.

For a ring-fenced body of the bank to operate independently it will require support functions. Can you identify employees who will support the ring-fenced area only? If not, you will have to consider the assignment of a team.

Ring-fenced bodies must act in accordance with human resources and remuneration policies meeting 'specified requirements'. It is currently unclear what these are but is likely to create the need for a review of bank policies and may cause employee relation and recruitment issues if there is a disparity between employees inside or outside the ring-fenced body."

The Banking Reform Act is arguably the biggest headache facing any large bank currently trading with the United Kingdom. And if the extracts above are not clear enough, it seems to many that the now-inevitable ring-fencing of retail operations will not just mean a safety net wrapped around the savings of your customers, it will mean entirely new management structures and employment organisations in addition to your already existing resources in these areas, bringing with it all of the process required for an operation of that complexity to operate – recruitment, development and disciplinary processes. Remuneration policies. Customer service and product processing procedures. The list goes on and on.

Don't settle for less

In short, if business processes are not already in the forefront of your mind, they really should be. For every change in the legislative landscape, new processes are required, and in order to excel and compete in the financial industry, ‘good enough’ is no longer good enough.

Process excellence is more than a nice to have, it is an imperative if you are to successfully navigate through the late stage aftermath of the financial crisis.


Thank you, for your interest in 3 ways new regulation is impacting OpEx in the finance industry.
Craig Sharp
Contributor: Craig Sharp