THE BLOG

Why Regulatory Compliance for Financial Services is Akin to Road Maintenance

02/04/2013 11:34 BST | Updated 28/05/2013 10:12 BST

Since the financial crisis hit, the banking and financial services industries have had to deal with myriad measures to shore up their foundations, create transparency and minimise risk. However, as financial institutions race to meet constantly changing regulatory compliance, there is a danger the flow of demands are seen as a tick-box exercise, rather than building a sustainable platform to deal with future compliance requirements.

With so much change in a what is often a 'spaghetti of legacy / new systems and processes' it will always be challenging and costly to make structural changes; hence banks will often take the least contentious path. After all, regulatory change is not revenue-generating and times are tough.

And who can blame them? Whether AIFMD, MiFID or CRD, regulations are highly specialised and there is a constant stream of new directives that have to be met, leaving compliance officers with a never ending list of tasks to complete to appease the regulators. What this checklist does not address, however, is the long-term planning that banks and financial services enterprises need to undertake in the regulatory race, including the need to bolster systems / teams to ensure sufficient resources are in place.

We believe that there are lessons to be learned from the world of road maintenance. The Financial Services Club's CEO Chris Skinner summed this up recently as knowing how to 'avoid digging up the road more than once', but it goes beyond this. For the banking and financial services sector, it should not be a matter of fixing things only when they are broken (or, in the business world, meeting regulations on an ad-hoc basis). The focus should be on preventing the need for road works or maintenance on an ongoing basis. The financial industry should be looking ahead to future requirements, keeping abreast of new routes and roads, both those being planned currently and also anticipating those that might be needed. This is a mid to long term view rather than short term fix.

Banks and financial services enterprises are faced with a huge volume and complexity of regulation; an effort in 2011 by ISITC Europe to create a summary of upcoming regulations included 22 regulatory initiatives and ran to 131 pages. Few people would be capable of absorbing this, even when summarised.

In response, the Clearing & Settlement Working Group (CAS-WG), in London, is trying to help the banking and financial services industry deal with the ever increasing actions for overloaded compliance departments and the need to avoid unnecessary costs by harnessing the power of 'crowdsourcing' and social networks to generate a list of the issues most likely to cause firms to have to "dig up the road more than once", as Skinner says.

The principle of urban crowdsourcing in road maintenance can be applied to the regulatory environment. One example of how this could work is an experiment in Boston, US, that has shown a positive success with urban crowdsourcing. Using the latest technology developments in smartphones and apps combined with neighbourhood goodwill, the public report problems on the spot, for example potholes, from a mobile device and get real-time feedback as they get resolved. The Boston Mayor, Thomas Menino, set up a New Urban Mechanics Department to identify ways for the public to report problems electronically and automatically.

The crowdsourcing element involves asking the industry for proposals for what are called Road-Works Issues or RWIs. In the same way that Boston residents can provide feedback on road maintenance and other issues, our industry can plan for the future and its 'roadmap' by crowdsourcing our own priorities. Only by knowing where the hotspots and congested areas are in the road ahead can banks and financial services enterprises take more of a long-term view to achieving regulatory compliance.

At a time when there are not only multiple regulations coming into effect, requiring banks and financial services enterprises to ensure compliance, but these regulations are continually changing and being 'toughened' to meet with Government and commission bodies such as the Parliamentary Commission on Banking Standards, it is vital for the banking and financial services industries to have a view and strategy for the road ahead. It is true that banks will be differentiated by their level of customer experience rather than compliance. Nevertheless continuous piecemeal changes to systems and processes may end up impacting the customer experience. Hence regulatory compliance should not be a seen as a tick-box exercise but rather an opportunity to review and vet the health of an organisation and consider the future needs, as one might the road infrastructure of a country. Much can be learned.