Data Tsunami to Drive Increase in Compliance Costs
By Shagun Bali, TABB Group
Originally published on TABB Forum
A cross-organizational, proactive approach to risk and compliance functions will transform regulatory necessity into a definitive business advantage. But institutions simply do not have the systems or control of data they need to make complex analytics an integral part of workflow or enable information to pass back and forth within different functions. As a result, TABB Group forecasts global compliance market spend will rise as much as 8% in 2015, reaching $2.6 billion.
The institutional capital markets are dealing with the aftermath of one of the most aggressive periods of regulatory intervention since the Great Depression. The costs and consequences of non-compliance within financial services are greater than ever before. In addition, the industry is going through tough times with thinner margins, all-time low volumes and low investor confidence. As a result, firms are dealing with new realities: Do more with less and adhere to stricter regulations. Existing legacy processes and technology across the front, middle and back office do not help meet these goals. Traditional risk and compliance data management techniques have largely failed to meet internal expectations and regulatory requirements.
As regulations continue to toughen, compliance departments will face challenges in terms of managing large volumes of data and the increasing costs associated with storing, retrieving, analyzing and producing that data in a consistent, unified and efficient manner. Governance, risk management and compliance (GRC) regulations have made it imperative for all functions and businesses within financial institutions to share information more readily and rapidly in order to meet regulatory requirements and support and improve investment decision-making as a whole.
The cost of compliance and the corresponding failure to maintain a compliant institution is going up. TABB Group forecasts global compliance market spend will rise 7.5% to 8% in 2015, reaching $2.592 billion from $2.430 billion in 2014, and growing at a similar pace for 2016. FINRA and SEC data also support the argument that the cost of compliance and compliance failure is on the rise. FINRA fines are at their highest levels since 2007/2008, and FINRA regulatory fees are near all-time high levels (see chart, below).
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Source: FINRA / TABB Group; SEC/TABB Group
For the effective aggregation of data, institutions need to streamline their application portfolios, standardize and normalize data more effectively, and ensure the rapid integration and sharing of data across systems. With a holistic view of data, the ability to harness synergies across the reporting requirements under new regulations offers tremendous opportunities. A cross-organizational, proactive approach to risk and compliance functions will transform regulatory necessity into a definitive business advantage. However, institutions simply do not have the systems or control of data they need to make complex analytics an integral part of workflow or enable information to pass back and forth within different functions.
Having said that, enterprise-wide compliance requires a push from top management. Visionary leaders need to introduce a new and efficient architectural paradigm that enables a holistic and unified view of internal and external data. Executives need to push the idea of working with vendors and automating parts of the compliance process. This will help save money and time for the institution as a whole.
The vendor solutions overall point to an increasingly dynamic and innovative GRC market. AxiomSL is aggressively working across the globe to help its clients automate regulatory reporting that would ease the burden on compliance departments. Bloomberg Vault is leading the market for trade reconstruction required to comply with CFTC rules. BWise has created a process-based approach for deploying the GRC platform that saves time and effort. NICE Actimize has created a differentiated offering for communications surveillance and voice analytics that are required to comply with the Dodd-Frank Act in the US. Protegent is helping its clients meet regulatory pressure by analyzing internal and structured data sets before they make the leap to analyzing external data sources.
Vendors still have much further to go to integrate with internal and external data sources, as well as to make ”social” a truly central part of the compliance reporting. Stronger analytics offerings related to risk management and alpha generation are also increasingly important to financial institutions, moving beyond the simple reporting functions of the past to robust visualization and true functionality related to ”Big Data.” These, along with more flexible deployment models and institution-specific workflow design, have presented clear opportunities for vendors to distinguish themselves.
Investments are inevitable for the infrastructure necessary to meet the distinct regulatory challenges associated with trade reconstruction (integrating structured and unstructured data). Those that make the real-time analysis and exchange of data part of their everyday workflow across the front-, middle- and back-office functions will be primed for both compliance and profitable growth. The sooner IT leaders act to address these challenges, the more successful they will be in meeting the compliance and data management requirements of this new era.