One of the few certainties about the coming year
is that there will be a greater focus on banking
regulation: this may take the form of more regulation
or an emphasis on making current regulations work
more effectively. Either way, we can be sure that
closer scrutiny is coming. David Greenwood takes
a look at how best to cross the approaching regulatory
hurdles in 2009.
As the ancient saying goes,
all roads lead to Rome. In 2009, however, it would
seem pertinent to say that all financial roads
lead to regulation. Given the scandals of 2008
and the greedy schemes of lone rangers such as
Jerome Kerviel and Bernard Madoff, regulation
would appear to be the culprit caught in the stocks,
surrounded by the angry mob.
The taxpayer, for example,
who has funded the bail out will want his pound
of flesh; politicians, in turn, will feel the
need to introduce more regulation and increase
the pressure upon financial institutions to adhere
to it; shareholders are going to want financial
institutions to demonstrate they are compliant
because they know it’s the way they can
secure and recover their investment; senior executives
and board members will be anxious to demonstrate
that they are cleaner than clean to all their
stakeholders and the world at large; and finally,
the regulators themselves will be worried that
they have been caught, effectively, sleeping on
the job and will want to make sure that they prove
their value.
Pressure may not only come
from within the UK: in this global market, US
and EU regulators views and wants will be important
and also may conflict. Topics on the agenda already
include Capital Adequacy and Basel II and the
Payments Services Directive.
So it is clear that regulation is centre stage,
but the question remains, how do we make it work?
To implement major regulatory
change, most organisations set up a project or
programme to deliver it. These programmes consume
significant amounts of investment and traditionally
have a high track record of failure in financial
institutions. Whilst they may “deliver”
or be completed, closer examination of regulatory
change shows a track record of scope change and
missed deadlines. Frequently, they deliver late
and over budget, neither meeting the objective
of the regulations or the regulations as written.
Since banking as a culture focuses on products
and growth, regulatory projects are seen as those
that consume resources and investment, which should
be devoted to other projects. In short, regulatory
projects are the Cinderella projects: they aren’t
sexy, no one wants to do them and they are, at
best, tolerated. Inevitably, they are often underfunded
to achieve what is planned with predictable results.
This lack of interest means
a lack of focus and thus, accountability is blurred.
The natural order of change in banks means that
the people who instigate regulatory projects aren’t
around in the next three years. So who gets held
to account when things don’t work and who
holds people to account?
And who’s going to
make this change anyway? One of the first casualties
of most banking downsizes are the project and
programme managers in the change teams. Thus,
the people who would have been able to fix the
problem have been fired, so to speak.
So you have to make regulation work but there
are many challenges, people are poor at doing
it and it uses up too much money – what,
then, can be done?
The first step is to define
the business opportunity, which exists in the
project at hand, for example, could you do something
more intelligent at a marginal increase in cost
or use the opportunity to replace systems and
improve processes and therefore reduce costs –
a project that, perhaps, would not have been done
otherwise? There may even be a commercial opportunity
available: some regulations provide the opportunity
to create new products or propositions, which
can be launched as a direct response to the regulations
themselves.
At this initial stage, it
is important to ensure that too much time (and
of course, money) isn’t spent developing
the solution too early. Projects that start early
often get bogged down in the draft regulations,
thus, holding your nerve and shooting late will
reduce cost through reduced rework.
Furthermore, remember that
ultimately both you and the regulators want the
same thing, namely to mitigate risk, ensure that
markets are efficient and fair and as a result,
maintain credibility. Many organisations challenge
round the edges of regulation rather than build
on the new spirit of openness between regulators
and regulated and push back on whether it will
deliver the required outcome, increase costs for
customers or can be feasibly achieved in the time
allocated.
Opportunities to push back
can sometimes been limited so once the regulations
have been agreed, produce a joint project with
the regulators to deliver the change so that you
are working towards a common goal.
Successful delivery focuses on the outcome and
accountability
It would seem that almost
everyone in any organisation, pays lip service
to accountability these days. In fact, the most
successful regulatory programmes are those where
the right owner is made to feel accountable. It
might seem like a simple premise, but how do you
define the right owner? In the eyes of the regulator,
it is also a simple answer – the right owner
is the person who will be responsible if there
is a failure.
Certainly, successful regulatory
change is not achieved by making someone in a
regulatory function “accountable”.
Instead it is achieved by making people who run
the day-to-day business (which includes the levels
for delivering compliance) visibly accountable.
This accountability needs cascading down throughout
the organisation.
A clear solution is vital
and ties up with not starting too early (see above)
and being clear about what other business objectives
must be fulfilled. The focus needs to be on whether
the solution delivers the right outcomes, particularly
in global organisations, where multiple solutions
may be required in different geographies with
different systems and legal environments.
There is a tendency when
addressing regulatory projects to look to technology
to provide the solution. Technology does in fact
play a key role and automation will reduce the
human error, but over emphasis on technology has
several risks associated, such as the significant
cost and time delays involved in buying a new
system (which works against keeping regulatory
costs down) and an over reliance on systems to
deliver compliance against the use of people’s
skill.
The overall solution is to
focus on the outcome and identify the options
for making the change. For example, different
business units of the same organisation address
the same regulatory issue in different ways: during
a recent regulatory project, one business unit
made a small system and manual process change,
which took two months to achieve, whilst the majority
of parts elected to use the “Group wide
solution”, adopting new technology which
cost significantly more and took over a year to
implement, and yet was no more effective.
In conclusion, there is no escaping the reality
that regulatory focus in financial services is
going to increase in 2009. The challenge will
be to do this efficiently to minimise investment
in non-profit making projects at the same time
as actually delivering the compliance needed to
allow the bank to operate and maintain stakeholder
credibility.
David Greenwood is a
Financial Services focused Programme Director
who has delivered a series of regulatory programmes
within a top tier global bank. He has defined
and run the portfolio of regulatory programmes
for a global international bank. Additionally
he led the rescue of key projects within UK retail
banking to enable compliance with regulatory standards.
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