Articles - Regulation - updating financial IT to comply with regulation


We don’t need to look far to see that regulators are showing an increasingly detailed interest in financial services organisations. There is also an inevitability that, as this level of detail increases, so will the reliance on information technology to demonstrate firms’ compliance efforts. Whilst IT can provide firms with vital tools for this purpose, IT alone is not enough.

 By Robert Gothan, CEO and founder of Accountagility – the leading business process management specialist
 The higher regulatory bar requires real behaviour change within an organisation, as well as persistence and a culture of continuous improvement. Technology enablement is nothing without user buy-in.
  
 Capital Requirements
 First and foremost, regulators are concerned with capital requirements. Are organisations’ balance sheets robust enough to be able to withstand the worst (or almost-worst) case scenarios in the face of regulations like Solvency II and Basel III? Firms will need to have reliable data in order to find out, along with good upstream systems and a clean, systematic approach.
  
 Reliable Data
 Our first contact with IT is often when we need to access data. However, it’s clear that this is not a winning formula. From a consumer perspective, this is like talking to a supplier after the manufacturing process has been completed. These conversations clearly have to start earlier, so that we can define what reliable data looks like from the outset.
  
 Defining data quality with IT is an exercise in formalising intellectual property. Spend enough time around your organisation’s data, and you’ll soon learn (from trial and error) what “good” and “bad” look like. But we need IT to help formalise this into a set of business rules and ensure it can be implemented.
 Returning to user buy-in, merely producing exception reports is not enough. Firms need to integrate this knowledge back into their processes and measure their adherence to these controls.
  
 Risk
 In order to assess capital adequacy, we need to understand the risks that organisations are taking. Most firms are pretty good at taking risks, but they’re normally not as good at quantifying and capturing them in a meaningful form.
  
 Clearly, technology can provide firms with the capability to capture and monitor their risks, but changes are also required within the business. IT has been criticised in the past for not being able to keep up with new commercial initiatives, but it’s the ability to introduce process agility that is truly critical to success.
  
 Firms also need to know where the risk is. This can be complex in insurance, where a single risk can be attributable to multiple territories. Solvency II has exposed a major flaw around binding authorities, for example, and this has become a hot topic within the industry.
  
 Pricing
 Once firms know their risks, they need to price these risks correctly in order to maintain their capital. This is an area of opportunity for IT to help the business; in many organisations, risk is still priced manually on a spreadsheet or using simple rating tools.
 Risk pricing, done properly, can take advantage of big data and predictive analytics. It is becoming clear that “pricing by gut instinct”, though valuable, is no longer enough. Firms should expect regulators to look more closely at their pricing processes into the future.
  
 Conduct
 To satisfy the Financial Conduct Authority if nothing else, firms need to demonstrate that they have systems and processes to deal with Conduct Risk. Obviously, at the one end, there are systems and tools designed to prevent leakage of sensitive information, detect fraud, and other potentially adverse activity.
  
 The lost opportunity, however, lies in behavioural science. Do firms understand, for instance, how their organisation approaches Risk x Price? Do they know what factors lead them to take good risks vs. bad? Investment funds are benefiting from behavioural analytics around their buy and sell decisions. These tools support the business by helping them to make better, more consistently positive decisions around risks.
  
 Solutions around conduct tend to be technology-related, but they still require a balanced and mature and honest business attitude to get the best results.
  
 Start with Automation
 Implementing these ideas overnight would be nice, but they cost money and firms cannot afford to take their eye off the ball. For the business to spend time on these valuable activities requires efficiency gains elsewhere. This is where business process management and automation can help.
  
 All of the above ideas, though valuable, can only be executed on the back of solid business processes. For every manual process that firms can streamline, there is time to bring more strategic thinking to the table.

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