Gareth Richardson, UK MD at GFT

In June this year GFT Group released research examining trends in the global financial regulatory environment, gathered from 66 global and domestic investment banks across the UK, Europe, North America and Asia. The research findings highlighted the diversity of regulatory environments across continents, and sought to explore how investment banks can, and must, successfully tackle this. As a result of ongoing regulatory change, banks are obliged to ask themselves critical questions on how they can innovate and adapt their internal operations in order to react more strategically to ‘The New Normal’ environment.

Banks have had some time, post 2008 crisis, to become accustomed to the regulatory environment, so there may be a temptation by some to believe there is nothing particularly new or transitional about this current wave of regulation. However, this perspective is incredibly ill-advised. The volume, scale and complexity of competing regulations that banks now face is vast compared to that previously experienced within the banking industry. Banks cannot simply go back to their previous mode of operation after solving the latest regulatory challenge. Regulation is not a temporary phenomenon, it is here to stay, and will continue to be a relentless tide that the banks must face on an ongoing basis, and they must adapt to this or face the consequences.

Understanding ‘The New Normal’

Of those questioned as part of the research, an overwhelming majority believe that their organisations now operate in an environment of constant regulatory change, and this situation is not going to change anytime soon. However, as it stands,  many banks have not yet grasped that a fundamental re-think of their business models is required in order to successfully tackle this regulatory challenge. Failing to do so means they cannot capitalise on the opportunities that the new regulations can provide; often as a catalyst for strategic investment and business change.

In this sense, the research revealed a contradictory message from respondents over their thoughts and efforts in tackling regulation. Most banks believe that they now have the opportunity to make better business decisions, but worryingly, many still view regulation as merely an ‘exercise in compliance’. This is contrary to the reality of The New Normal. It requires fundamental business change.

Our research showed that banks are actively communicating regulatory information within their organisations and measuring the impact of regulation on their businesses, but only 48% say that they actively act upon their findings to help improve their businesses. We know that to gain a competitive advantage in The New Normal environment, banks must go beyond compliance and approach regulation strategically rather than tactically.

A strategic approach is fundamental to survival

Most respondents admitted that their organisations pursue manual work-arounds to meet regulatory requirements, which indicates that they continue to approach regulation from a tactical rather than a strategic standpoint. This dependence on tactical work-arounds may ‘tick the boxes’ for regulatory compliance in the short term, but it inevitably leads to a legacy of ‘technical debt’ which will require further remediation at a later date. This appears to be something that most firms acknowledge and accept, but strangely, 40% of respondents do not believe further remediation will be required. What is clear from the survey, is that most respondents believe that regulatory change has increased the focus on compliance rather than business innovation. What is not evident is how respondents intend to move beyond compliance and ultimately transform their business models to cope with The New Normal.

It is crucial that banks find a way to operate and perform better in this new regulatory world, as quickly as possible. This is particularly significant when returns on equity and capital are now dramatically lower than before the 2008 financial crisis. Regulation needs to be considered in its wider context, with banks identifying how each regulation will impact different business units across the organisation as a whole, rather than looking at each regulation in an individual silo. Unfortunately banks will need to seriously consider which of their business functions can remain competitive and profitable in the environment of The New Normal.

How to triumph in The New Normal

The New Normal requires banks to answer important questions from regulators on how well each institution is governed and managed. Having the ability to access the correct data to demonstrate this is fundamental, but also being able to adequately decipher that data is just as vital. Having the capability to aggregate high quality risk and financial data will be an essential component to thriving in The New Normal regulatory environment.

The struggle that the banks will face is that the plethora of disparate data sources, systems and unintegrated processes means establishing effective data aggregation processes is incredibly difficult. The existence of poor data structures and legacy data models are just some of the factors that contribute to the use of tactical work-arounds. This will require a review of data governance structures as well as examining how new and existing legacy technologies can be leveraged to aggregate data better, to make improved business decisions and to answer regulatory questions far more quickly and easily.

One thing is clear, the banks that are planning to not only survive The New Normal, but to thrive in this new regulatory environment, are those who embrace the opportunity and take a strategic approach in handling it. Banks in general need to take a more thorough and strategic review of what the each regulation means for them and their business. Tactical fixes and increasing technical debt are not sustainable in the longer term, and banks now need to start reviewing their business models, client relationships and consider investing in enterprise-wide technology in order to begin thriving in this new world of continual regulation.