The ‘New Normal’ of Continuous Regulation


By Jeremy Taylor, Head of Business Consulting (UK), GFT

Banks must start asking more critical questions on how they can innovate and operate more strategically in ‘The New Normal’ environment of continuous regulation, according to a new survey undertaken business and technology consultancy GFT.

Our research surveyed 66 organisations which included global and domestic investment banks and CCPs in the UK, Europe, North America and Asia. An overwhelming majority of those questioned believe their organisations now operate in an environment of constant regulatory change that we have phrased ‘The New Normal’, a situation that looks likely to remain for the foreseeable future.

However, the results also reveal that too many banks are failing to understand that a fundamental re-think of their business models is required in response to this regulatory challenge. Without this, they cannot capitalise on the opportunities that regulation provides, in order to drive through strategic investment and business change.

Our survey’s findings reveal a contradictory message from respondents over their thoughts and efforts in tackling regulation. Banks believe they now have the opportunity to make better business decisions, but still see regulation as essentially an ‘exercise in compliance’. Banks are actively communicating regulatory information inside their organisations and measuring the impact of regulation on their businesses, but only 48% claim they are acting upon their findings to help improve their businesses. To really gain a competitive advantage in ‘The New Normal’ environment, banks must go beyond mere compliance and approach regulation strategically rather than tactically.

Jeremy Taylor, GFT

Jeremy Taylor, GFT

Most respondents admit that their organisations create manual work-arounds to meet regulatory requirements, indicating that they continue to approach regulation from a tactical, rather than a strategic standpoint. This over-reliance on tactical work-arounds may ‘tick the boxes’ for compliance in the short term, but it inevitably leads to a legacy of ‘technical debt’ which will require further remediation at a later date. This is something firms acknowledge and accept but strangely, 40% of respondents do not believe further remediation will be required.

What is clear from the survey’s findings is that most respondents believe that regulatory change has increased their focus on compliance rather than business innovation. What is not evident is how respondents intend to move beyond compliance and transform their business models.

Banks have had sufficient time to become accustomed to the regulatory environment and there may be a temptation by some to believe there is nothing particularly new or ‘game changing’ about this current wave of regulation. However, such a viewpoint would be very misguided. The volume, scale and complexity of competing global regulations is now on a different level to anything previously experienced within the banking industry.

Banks cannot simply go back to how they used to operate after solving the latest regulatory challenge. Regulation is now not a temporary phenomenon, it is here to stay, and firms must adapt to his or face the consequences.

Banks must urgently begin asking questions on how they can operate and perform better in this new regulatory world, particularly when returns on equity and capital are now significantly lower than before the 2008 financial crisis. Regulation needs to be considered in its wider context, with banks identifying how each regulation will impact business units across the organisation as a whole, rather than looking at each regulation in an individual organisational silo. Banks will also need to seriously consider which of their business lines can remain competitive and profitable in the new paradigm.

The New Normal requires banks to answer important questions from regulators on how well they are governed and managed as institutions. Access to the correct management and financial data is crucial to this. Being able to aggregate high quality risk and financial data will be an essential component in the new regulatory environment.

The difficulty for banks to achieve this is the plethora of disparate data sources, systems and unintegrated processes within the firm, means establishing effective data aggregation processes is incredibly difficult. The existence of poor data structures and legacy data models are just some of the factors that contribute to the use of tactical work-arounds. This will require a review of data governance structures as well as looking at how new and existing legacy technologies can be leveraged to aggregate data better, to make improved business decisions and answer regulatory questions.

The message from our survey results is very clear. Banks that are likely to be successful in future will be those that are able to treat regulation as an opportunity to take a strategic approach, helping to transform their business. The successful investment bank of the future, is likely to look very different from those that exist today. Every bank must strive to review what all of the regulation means for them and adapt their business models accordingly.

In addition, the continuing over-reliance on tactical fixes will only increase costs further, leading to a rise in technical debt. Tactical fixes and increasing technical debt are not sustainable; banks need to start reviewing their business models and client relationships, and invest in more efficient enterprise wide technologies in order to be flexible and able to thrive in this new world of continuous regulatory change.

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