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Enterprise risk management

The challenge of regulatory growth

Financial institutions face numerous major regulations. These range from the EU’s Solvency II (insurance), Markets in Financial Instruments Directive (MiFID) and Alternative Investment Fund Manager Directive, to the U.S. Dodd-Frank Act and the Basel capital adequacy requirements.

Just similar enough to complicate matters

While there are often common “regulatory intents,” particularly with respect to valuation of portfolio holdings; understanding risk exposures to clients and counterparties, and to client classifications; inconsistencies between regulators make it difficult to “kill two birds with one stone.” Firms often find they need discrete processes to derive the data required to comply with separate regulations asking essentially the same question.

For example, Tier 1 firms operating in multiple regulatory jurisdictions may need to adhere to local regulations such as Dodd-Frank and MiFID II, while at the same time meeting the global capital adequacy requirements of Basel III. In other cases, service providers are impacted by the regulatory requirements facing their clients, e.g., insurers turning to their asset managers for help meeting Solvency II’s“look-through” valuations requirement.

Benefits of exploiting commonalities of data across regulations

Nevertheless, four potential strategies exist for leveraging similarities among regulation data requirements to manage responses. Consider the following tactics alongside their corresponding advantages:

1. Data Consistency – A synchronized regulatory program can enable consistent reporting to regulators and also provide consistent data feedback across the enterprise.

2. Organizational Efficiencies – A coordinated effort can result in both fewer required staff members and possible systems consolidation.

3. Cost Savings – Cost savings are achievable through identification of duplicate coverage or reduced data demand through simplified processes.

4. Reduction in Data Sources – A harmonized approach can remove duplication of data.

Additionally, participants in a 2016 Thomson Reuters study, “Harmonizing the Approach to Regulatory Compliance,” reported the following recommended approaches based on their professional experiences:

•  “[…] on BCBS [Basel Committee on Banking Supervision] 239, we are working not only on regulatory reporting, but also on taking out operational risk by focusing on the timelines of data. BCBS 239 lays out in data management terms what is necessary.”

• “Too often, compliance is achieved and change programs end. You have to go the extra mile to get business benefits — for example, to get cost efficiency you may need to switch off the systems.”

• A final respondent suggested that a harmonized approach can benefit global projects where the underlying data needs to be of a certain quality and synchronization, citing BCBS 239 and BCBS 265 (Fundamental Review of the Trading Book).

Regulations on the rise

The current rate of regulatory activity is growing significantly year-on-year and 70 percent of firms expect regulators to publish even more regulatory information in the next year, with 28 percent expecting significantly more. Some estimates put the cost of regulatory compliance up at $4 billion per year at some of the largest banks, although it’s hard to measure and will vary greatly from firm to firm. Being able to manage this regulatory deluge in a strategic and harmonized way is increasingly important.

To read the full report, visit: bit.ly/harmonising-approach-to-regulatory-compliance

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