Finding advantage in the new normal

Finding Advantage in the New Normal An Economist Intelligence Unit research programme FINDING ADVANTAGE IN THE NEW NORMAL Introduction For financial services firms, a complex, highly regulated global marketplace is now the “new normal” The challenges inherent in this new normal present a clear opportunity for companies to improve performance while contributing to the bottom line and enhancing the client experience By integrating compliance and regulatory requirements, companies are achieving operational efficiencies, refashioning their corporate cultures and developing and refining best practices Many firms are starting to view regulatory compliance as a catalyst for business transformation For individual firms and for the financial services industry as a whole, regulatory demands can help drive the development of more robust, more unified, more responsive and more flexible operations Regulatory compliance can actually become a springboard for making needed improvements to business models Companies of all sizes are embracing regulation as an avenue to achieve operational excellence Large sell-side firms that historically insource technology and operations are now turning to third parties for assistance, while smaller firms are seeking to benefit from the increasing number of shared services To understand just how operational teams are contributing business value to their companies in these highly regulated times, the Economist Intelligence Unit (EIU) conducted a survey, sponsored by Broadridge, of 414 financial services executives, 40% of whom hold C-level positions Some key takeaways from the research include: • More than half of financial services executives surveyed say that expanding into new markets is the single biggest overarching business orientation, with many citing regulatory compliance as the biggest hurdle to organizational success • Regulatory compliance is heavily dependent on technology, which—despite becoming more affordable—still requires companies to make the necessary investments • A robust, integrated and centralized system that accommodates varied regulatory demands from multiple jurisdictions can form the basis for highly productive and efficient operations • Development of automated operational processes that integrate risk management, audit trails and compliance functions is cited by nearly half of survey respondents as the best way to respond to more intense and detailed regulatory and governance requirements • Businesses would be wise to foster a culture of compliance, which requires hiring specialists and educating the entire employee base FINDING ADVANTAGE IN THE NEW NORMAL New Markets and New Rules More than half (57%) of executives surveyed by the EIU say that expanding into new markets is their single biggest business orientation The majority of respondents also cite more intense regulation and governance as the most important challenge to organizational success Put regulatory compliance and new markets together and the challenge is compounded (See Chart and Chart 2.) Chart What is your company’s overarching business orientation? 0% 20% 40% 60% 80% 100% Expanding into new markets Consolidating existing markets Status quo Each additional market presents many new hurdles Perhaps none are as challenging or as significant for operations teams as regulatory compliance Poor operations can attract more regulatory scrutiny In turn, more regulatory attention can result in damaging publicity and customer attrition, not to mention massive amounts of institutional time and resources spent clearing any issues “There is no way you can compromise,” says Lars Seier Christensen, CEO of Copenhagen-based Saxo Bank, a financial services firm focusing on online trading, with operations in 25 countries “When allocating resources,” he says, “meeting regulatory requirements is always top of the list; if you don’t meet those, you are potentially out of business.” Chart Which of the following trends presents the single most important challenge to the success of your organisation? 0% 20% 40% 60% 80% 100% More intense regulation and governance Changes in market or industry structure Growing globalization Technology advances Other (please specify) Don’t know/not applicable FINDING ADVANTAGE IN THE NEW NORMAL Most brokerage firms and money managers with international reach appear to have accepted the realities of a more regulated global marketplace and are coming to grips with multiple regulatory landscapes, though much more work is to be done: Only 17% of respondents to the EIU survey say they are fully prepared for coming regulatory reforms (See Chart 3.) Chart How prepared is your company to implement new regulatory reforms? 0% 20% 40% 60% 80% 100% We are fully prepared for the entire array of coming reforms We are prepared for most anticipated reforms and we have initiatives in place to get ready for others We are only partially prepared We are not prepared at all Don’t know/Not applicable “For many firms [a centralized system] not only helps them deal with regulatory issues, but is a basic enhancement to their ability to operate efficiently,” says Randi Weinberg, a senior manager with global consultancy Kurt Salmon’s financial services practice “You might be implementing a centralized system to address a regulatory concern as the primary motivation, but there are a lot of downstream benefits.” An Opportunity for Tighter and Smoother Controls While nearly everyone recognizes the challenges inherent in increased regulation, less obvious are the benefits A robust, integrated and centralized system that accommodates varied regulatory demands from multiple jurisdictions can form the basis for highly productive and efficient operations, including consolidating data that can also be used for revenue-generating activities In years past, everything from speed and ease of use to solid risk management and systems redundancy marked operational excellence within the financial services industry They all remain crucial However, the 2008 global financial crisis rearranged the mix Handling regulatory complexity is now front-and-center, reflecting demands as well as heightened expectations from regulators and from the customers of financial services firms As a result, operational improvements that ensure strong regulatory management can help identify and then remove internal structural conflicts that slow or complicate procedures They can assist in everything from audit trails to credit assessment and can provide management and boards with better monitoring They can make financial services firms more responsive to the needs of increasingly sophisticated and demanding customers, and, just as important, they can help improve the bottom line, which has been severely impacted by new regulatory requirements FINDING ADVANTAGE IN THE NEW NORMAL Center-of-Excellence Strategy Technology in the Spotlight Juggling multiple product offerings, regulations and regimes in many different countries requires a sophisticated architecture in control and in infrastructure It requires careful planning, manpower and capital While each organization may put its own imprint on regulatory-related operations, the key is system unification and integration Often, the most successful institutions establish a specialized team that has global responsibility and that receives assistance from local experts Regulatory compliance is heavily dependent on technology, which—despite becoming more affordable—still requires companies to make the necessary investments For smaller firms, that financial burden can translate into sacrificing new markets or product innovation Large firms with vast resources have an advantage in technology upgrades Nonetheless, all companies, big or small, are now facing the challenge of integrating and unifying this technology across multiple functions and geographies “Many firms set up a center or a function that actually pulls all this together, implements a framework internationally and works as a leader to help these different international resources to manage the regulatory and compliance functions in a similar way,” says Ms Weinberg, who has studied the process Saxo Bank focuses on the overarching goal to create a unified system that reduces ad hoc operations as much as possible According to Mr Christensen, the key is what he calls “our one-bank, one-platform strategy.” But “if it has to be done manually, then we it manually Otherwise technology is always our first choice.” He adds that technological advances over the past decade or so have steadily improved and heightened the reliance on computerized solutions Construction of automated operational processes that integrate risk management, audit trails and compliance functions is cited by almost half of financial services executives as the best way to respond to more intense regulatory and governance requirements (See Chart 4.) Stateof-the-art technology forms the foundation, with local specialists and expertise a necessary support Chart What measures can operational units take directly to improve your firm’s response to more intense regulatory and governance requirements? Building automated operational processes that integrate risk management, audit trails and compliance functions This electronic infrastructure is especially critical to regulatory demands, Mr Christensen says It provides an audit trail It offers proof that processes are standardized and compliant Of importance, regulators are not the only ones who can easily observe compliance; so, too, can a financial services firm’s own executives and its board 0% 20% 40% 60% 80% 100% Monitoring the regulatory reform agenda and assessing the operational impacts Attracting and developing stronger risk management skills Developing more transparent reporting processes Don’t know/not applicable Other (please specify) FINDING ADVANTAGE IN THE NEW NORMAL A Client-First Environment in New Markets Regulatory compliance on a global scale is, of course, much easier said than done Each jurisdiction has its own demands, reporting protocols, calculations and idiosyncrasies Even something as supposedly universal as the upcoming Basel III global accord on bank capital and liquidity will be subject to the interpretations of country regulators Robert Crudup is executive vice president at SEI, a $600 billion money management firm He describes a constantly changing environment in which regulatory compliance issues “keep coming They never stop.” Sometimes, he adds, regulators will announce a “very large regulatory requirement with the guidelines to follow Well, the guidelines don’t sometimes come as quickly as they should and the onus is on us to get to the finish line.” Accordingly, banks are spending time reviewing their operations in each country and deciding when and how to shift capital allocations in or out of legal entities “For the more sophisticated investors, it is important to know that the products they buy and are being offered to them in a given jurisdiction are safe and compliant,” says Mr Christensen “It [compliance] has added a lot of complexity It is costly and takes up a lot of time But it has some significant competitive advantages when you have an approach like ours… able to meet the challenge and that in an efficient manner.” In-House Solutions Versus Outside Expertise Balancing in-house expertise with external support is always a difficult call for operations Regulations-related systems are no exception While larger financial institutions can choose between constructing a system in-house or going outside, many others must outsource Regardless of the choice, the emphasis must be on systems integration “The definition of optimal is different for every institution,” says Ms Weinberg “Both in-house and outsourcing require the same level of oversight, and the more and different systems you have, the more difficult integration is.” This would indicate the strategic value of using the same technology or vendor for different outsourced systems The increasing availability of affordable technology through third-party vendors allows smaller firms to continue to compete in an increasingly complex, highly regulated marketplace Such is the case of Saxo Bank While due diligence from prospective clients once focused on risk management, these days, it’s “How these guys deal with regulatory complexity?” says Mr Christensen, who believes that having best-in-class systems offers a real competitive advantage “It lifts a bit of the stone from the hearts of smaller institutions that feel regulatory obligations are very overwhelming” and a huge cost and a drain on resources, he says Embracing Regulations Through Corporate Culture Compliance and governance demands from customers and regulators are here to stay As a result, a business ethos that accepts, if not welcomes, regulatory oversight is a worthy goal of all financial services firms FINDING ADVANTAGE IN THE NEW NORMAL “Regulators won’t go away; they are here to stay,” concludes Dmitry Pugachevsky, head of research at Quantifi “The sooner financial institutions admit this and embrace this, the sooner they can benefit from a lot of operational plusses.” Regulatory management and control must be integrated with the rest of operations That goal, however, may be at odds with the perception of some employees who consider regulations and compliance something distinct and separate from other business functions “The more that these institutions are struggling and being challenged by all the requirements, the more likely it is that vendors and service providers will develop tools for managing those challenges and that multiple institutions will use the same tools.” ~Randi Weinberg, senior manager, Kurt Salmon To overcome this, financial services firms need to work toward instilling a culture of compliance They will need to hire regulatory and compliance specialists and empower them These firms will need to educate all staff, with management leading by example It’s not enough for executives to comply, they need to truly embrace the changes and integrate them into every aspect of operations and the client experience Conclusion In the past, many financial services firms operated various product or market platforms that were independent, not replicated elsewhere and difficult to manage across the overall system Now, regulatory and compliance-related pressures are forcing an overhaul of those platforms to standardize them across offices and regions A centralized system of regulatory and compliance operations has its benefits It allows a firm to embrace best practices, coordinate policies and procedures and identify required resources This is critical not only for accurate and on-time communication to regulators, but it also creates more streamlined, efficient operations All good for businesses and the customers they serve Contact us For more information on this report, please visit broadridge.com/OperationalExcellence About Broadridge Broadridge Financial Solutions, Inc (NYSE:BR) is the leading provider of investor communications and technology-driven solutions for brokerdealers, banks, mutual funds and corporate issuers globally Broadridge’s investor communications, securities processing and business process outsourcing solutions help clients reduce their capital investments in operations infrastructure, allowing them to increase their focus on core business activities With over 50 years of experience, Broadridge’s infrastructure underpins proxy voting services for over 90% of public companies and mutual funds in North America, and processes more than $5 trillion in fixed income and equity trades per day Broadridge employs approximately 6,700 full-time associates in 14 countries For more information about Broadridge, please visit broadridge.com No part of this document may be distributed, reproduced or posted without the express written permission of Broadridge Financial Solutions Inc © 2014 Broadridge Financial Solutions, Inc Broadridge and the Broadridge logo are registered trademarks of Broadridge Financial Solutions, Inc MKT_613_14 .. .FINDING ADVANTAGE IN THE NEW NORMAL Introduction For financial services firms, a complex, highly regulated global marketplace is now the new normal The challenges inherent in this new normal. .. educating the entire employee base FINDING ADVANTAGE IN THE NEW NORMAL New Markets and New Rules More than half (57%) of executives surveyed by the EIU say that expanding into new markets is their... governance Changes in market or industry structure Growing globalization Technology advances Other (please specify) Don’t know/not applicable FINDING ADVANTAGE IN THE NEW NORMAL Most brokerage