European Firms Fear Regulatory Non-Compliance

Terry Flanagan

Nearly half of all European financial services firms surveyed are expecting to be hit with huge non-compliance fines in the next 18-24 months, as many face falling foul of upcoming regulations, according to a new study.

As many as 40% of respondents to a pan-European survey of IT decision makers within the banking and insurance sector by London-based financial services think-tank JWG said that they lacked confidence in their firms’ ability to comply with regulations and are expecting the fines to be in the region of many millions of dollars per firm. While a massive 71% of respondents believed that adequate industry-wide infrastructure upgrades will still not be in place by 2015.

Regulations will begin to land on the statute books in the coming months and years, ranging from the implementation of new capital requirements, as defined by Basel III and Solvency II, and reforms such as MiFID II and the European Market Infrastructure Regulation that will significantly affect a firm’s systems, controls, reporting and record keeping ability.

“Many financial institutions are trying to run services on disparate systems whose complexity and inflexibility make it difficult to respond to regulatory demands,” said PJ Di Giammarino, founder and chief executive of JWG. “But non-compliance could lead to significant fines or even cost firms their licence to practice.

“The accountability for compliance will most likely lie with IT and operations, but there is no evidence that they are engaging with the regulators to set the right standards. There is a clear disconnect between infrastructure practitioners and compliance experts which needs to be resolved fast if firms want to maintain their competitive advantage as well as comply.”

The plethora of regulations set to come into force, which were ordered by the G20 group of nations following the global financial crisis of 2008, are looking like catching a good proportion of firms off-guard.

“The impact of the G20 regulatory reform on financial institutions’ ICT [Information Communications Technology] infrastructure requirements will be significant and it is clear that firms need to invest in the ‘correct’ technology,” said Kevin Dean, chief marketing officer of Interxion Holding, a leading European provider of carrier-neutral colocation data centre services, based in Amsterdam, who commissioned the JWG study.

“Building internal data centers is no longer an option for many firms due to capital restraints emanating from Basel III and Solvency II and the prevalence of legacy systems. Therefore banks and insurers are increasingly re-thinking their data center strategies and considering the externalization of their facilities.”

Just under a third of respondents said that it was likely banks would need third-party private data centers in order to fulfill compliance requirements, whilst being able to reduce operational risk capital buffers.

Dean added: “This research from JWG highlights the role suppliers can play in better supporting industry requirements and in helping banks and insurance firms navigate the vast terrain of legislation. Interxion is committed to understanding the impact of regulation on our customers in detail and to offering the appropriate solutions.”

The JWG survey, ‘FS Infrastructure: Ready for G20 Reform?’, was conducted from December 2011 to February this year, covering 36 institutions.

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