Post the financial
crisis, banks in the US have faced increased regulatory scrutiny that has
resulted in broader and tougher regulations. Bankers are fully aware of the
investments and efforts they have to put in to comply with these regulations. Consequently,
compliance function in banks is evolving towards a broader risk canvas that is now
seeking tighter coordination between the first and second lines of defense. This
poses new challenges to banks – from being compliant to getting the optimal returns
from their investments. The million
dollar question on everybody’s minds is
- How are banks rising up to this challenge?
Recent studies have
highlighted the enormity of the challenge this has created for banks. For
example one study by Accenture shows that 92% of banks will be compelled to
increase their compliance spend in 2014. In another report by Continuity
Control, the new regulations have imposed an additional financial burden for just
the last quarter (Q4) of 2014 is $241 million.
Enhanced regulatory
scrutiny may be a necessary evil to watch over the much-maligned banking sector,
but has spawned its own unintended consequences. The huge anxiety of banks to be compliant and
avoid penalties and the resulting hike in compliance spend has and will
continue to impact ROE and profitability of US banks for years to come.
How are banks
responding? A whole ecosystem of changes is taking place in this area. Banks are deploying analytics to help them
meet the challenge and enable them to make the right data driven decisions. Three
important changes are on their way.
First, bulk of the new spend has gone towards
upgrading technology platforms. Banks are integrating extant analytical and
compliance platforms so they can deploy data mining and analytics to get the
right insights. For example, analytical
models are being deployed to proactively identify and monitor UDAAP compliance in
customer engagements / acquisition.
Second, Banks are bringing new structural alignment
between first and second lines of defense.
Compliance is now a broad based enterprise activity that will report to
the Board or CEO and will include operational and business risk professionals.
This is a significant change because in my view, it facilitates wider &
deeper use of analytics to help banks stay compliant and out of regulatory
trouble.
Third, data silos – the usual suspects - are posing
roadblocks for banks in their new quest to be compliant. Incorporating structured
and unstructured data for analytics is also an urgent initiative at banks. Banks
are aware of these challenges - these are known devils anyway for some time
now; but a renewed urgency backed by fat budget approvals is evident.
Banks need to keep a watchful eye on the expanding
compliance management function. Technology upgrade and structural changes,
while necessary, are only part of the solution and not a panacea by themselves.
Banks need to look at compliance as an enterprise wide culture that every
associate lives by 24/7. In an era where changes are swift, where disruptive
innovations are continuous and almost a way of life, the best insurance for the
banks is an open mind to change and adapt to win the customers’ heart. In a
way, it is the same old wine, but in a new fancy carboy.
