Peter Guy, Regulation Asia, September 24, 2014

More Australian financial service firms have collectively taken the attitude that compliance and regulatory developments are a strategic opportunity and exercise that can support their overall business goals, compared to firms based in other regions. Financial organisations that comprehend how local and international regulatory frameworks will evolve and act upon key opportunities could possess a sustainable competitive advantage.

Ashley Crawford, managing director for SunGard in Australia and New Zealand, said, “Organisations have to deal with more regulatory compliance every year. To address this, clients look to outsource or deploy solutions that regulators may understand better than in-house technology. Where they can have someone else take care of that function, they are increasingly doing so. This helps firms apply more resources to the strategic initiatives that will help them differentiate themselves and develop competitive advantages.”

Crawford’s observations are based on a new SunGard report: ‘The Regulatory Pressure Cooker - Australia report.’ One of its key assertions is that regulatory compliance, market volatility and rising operating costs were identified as the key challenges for those surveyed. 61% of respondents approach compliance as a strategic exercise that can support their larger business goal.

Since the global financial crisis, banks and non-banks have experienced consistent demands for operational and technology improvements to meet sweeping new reporting and financial standards. Today, they are constructively addressing how to implement them. “Similarities exist in certain areas affected by regulations that suggest to management that there must be a way to determine and drive business benefits across functions and product areas. This might include finding ways on how to cross sell products based on similar compliance platforms.”

Crawford pointed out the long term cost implications. “Regulatory changes are occurring across the board that are affecting management and system budgets. This includes ‘know your client’ rules and FATCA, which have sharply increased technology spending to a point where it is taking up 80% to 90% of certain budgets.” In particular, Australian regulators have forced SunGard, other vendors and market participants to apply an integrated approach. “Immediate regulatory requirements in sectors such as Australia’s superannuation funds force us to think of developing systems that can adapt to evolving long term requirements.”

Crawford specifically points out, “The regulators’ priority is to be able to monitor the allocation of credit or capital on an almost real time basis to every asset class on a bank’s balance sheet. Other key regulatory areas of emphasis are insider trading, market abuse and tracking trading behaviour, the effects of electronic trading and surveillance on how investment activities are communicated on social media.”

Coordinating Business and Compliance

Common problem areas and obstacles come from both the core bank business areas and systems development. “While the technology infrastructure and hardware are able to cope with information processing demands, application development and coding is still quite a labour intensive effort.” His most interesting observation was, "Most of the frustration comes from managers responsible for core banking functions. Banks can’t afford to or are prevented from creating more risk engines. So managers need to adapt to a major mind shift – they not only need to build business, but satisfy regulatory regimes at the same time.”

Although outsourcing and subcontracting have become commonly used terms to solve and manage risk and compliance, they are major functions themselves. “Outsourcing strategies varies among banks. Vendors need strong credibility to qualify as a one point vendor. Banks are asking if onshore systems and solutions for corporate actions, claims and reconciliations can be exported to their other offshore enterprises and other parts of the organisation in order to save costs.” He also remarked that, “Vendors need to systematically gain the client’s confidence by successfully tackling problems in one area and then moving to others. This allows a diversified and multinational vendor to be able to convince clients to let them develop intellectual property for a product and use their data centre.”

In Australia, Crawford describes a regulatory environment where institutions are proactively seeking cost effective solutions in close contact with regulators. “Australian regulators are aware of the implications of their actions especially in the superannuation space. They are keen to meet, engage and debate proposals with a wider range of market participants. However, I have not yet seen a trend towards multiple Australian clients aggregating their platforms to save costs although it seems like an effective idea.”

The entire outsourcing issue has forced clients to carefully define which areas need to be subcontracted or kept in house. “Outsourcing has become a key strategy for financial institutions. A vendor approach to enterprise solutions combining consistent quality and best of breed solutions is driving outsourcing. However, trading algorithms are still developed in house to maintain proprietary ownership while trading solutions are being provided by vendors.”

He is optimistic about how bank departments are coordinating and adapting, while building business. “As regulatory changes progress and become implemented banks will be able to gain control and stabilise the costs of trading, processing, auditing, analytics and custody. Regulations are imposing a huge amount of cost, but they aren’t necessarily out of control. While this could discourage innovation in the near term, outfits like Alipay are proving that new platforms can disintermediate the entire industry.”

Crawford warns, “While the reputational damage due to compliance failures has become an intensified concern for CIOs and CROs, bankers can’t become complacent. They need to innovate new forms of risk and products in order to build their businesses and serve customers.”

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