Overwhelmed by Regulation? You're Not Alone

By Larry Tabb, TABB Group

Originally published on TABB Forum 

Financial regulators worldwide are developing rules that often conflict with rules in other jurisdictions, creating a web of overlapping and conflicting requirements that are making life especially difficult for banks, other market participants and their technology vendors. This new regulatory culture is changing the way that banks think about their businesses.

This week we gathered 25 senior industry members for a roundtable discussion on governance, risk and compliance (GRC), sponsored by Cognizant and hosted by yours truly. GRC today is such a hot topic that while we expected 18 participants, seven additional, very senior industry professionals just showed up. (Thankfully, we are a friendly bunch and didn’t kick too many folks out on the street in this very cold New York weather.)

There was one clear takeaway from the meeting: Capital market firms are overwhelmed by regulation. Regulators worldwide, working within their proprietary jurisdictions, are developing rules that not only cover the entities they regulate, but that also often conflict with regulatory requirements in other jurisdictions. While, for the most part, this hasn’t manifested itself in regulatory infighting, it does create a web of overlapping and conflicting rules, making life especially difficult for banks, other market participants and their technology vendors.

This new regulatory culture is changing the way that banks think about their businesses. Banks’ high-level GRC requirements, capital thresholds, and lower risk and leverage facilities are forcing management to make strategic decisions about their business portfolios. High-capital-risk and low-return businesses are being shuttered, and virtually every new business opportunity is analyzed not only through the lens of profitability, but also for capital and financial risk – not to mention “A1/C1 Risk,” or the risk of being featured on the front page of the Wall Street Journal.

So what are firms doing?

From a strategic perspective, firms are developing governance infrastructure, including risk, compliance, audit, and surveillance policy, and oversight committees to ensure that they have the proper structure and focus on everything from business mix to running a clean, flexible, and compliant organization. While having an appropriate governance structure is critical, however, many executives now are focused on the tactical aspects of compliance.

From a tactical perspective, firms are focused on the day-to-day: ensuring that their operations – whether running a dark pool, setting up a swaps desk, or managing margin for OTC trading – are in compliance with their direct regulators. From a high-level perspective, their core challenges are protecting the organization both from outside threats (cybersecurity) and from internal threats (through access-level protocols); managing trading market, credit, liquidity, and infrastructure risk; and ensuring that their tactical regulatory and compliance programs support the intense scrutiny from a barrage of regulators.

The real challenge, however, is that many firms’ infrastructure is either aged or outsourced, and the ability to aggregate, analyze, monitor, and police this information is extremely difficult. To accomplish this, firms are attempting to extract, virtualize, normalize, and integrate their traditionally siloed information. While many firms would love to develop a consortium or outsource significant infrastructure to a third party, many others believe that the effort, expense, and risk in extricating themselves out of their legacy technologies is just a bridge too far. This leaves most firms with the options of finding vendors to help them focus on the tactical exercise of extract, virtualize, normalize, and integrate, or completely outsourcing their infrastructure to a third party. Few intermediate options currently exist.

One of the only saving graces our group saw on the horizon was regulatory burnout/change in political leadership. But while we have seen regulators back track on “skin in the game” mortgage rules, regulatory commissioners challenge some of the Dodd-Frank scriptures, and of course the tremendous shift in political composition of our legislative bodies, few if any senior members who participated in our discussion believed that this change would bring any significant short-term relief; and some are convinced that the dye already has been cast globally, and there would be little if any major strategic directional regulatory shift.

Based on the strong turnout for this roundtable, these issues clearly are top of mind for industry leaders. We look forward to continuing the discussion.