Getting ahead of the regulation rush for financial firms

Why can't banks respond to regulatory requirements quickly?

For banks and financial institutions, regulatory compliance is more than just avoiding fines and penalties, it is the basis for trust and stability. By complying with regulations, banks ensure fair and transparent practices, safeguard against financial crime, and maintain adequate capital reserves to survive economic downturns. This not only bolsters customer confidence but also prevents systemic risk and contributes to a healthy, functioning financial ecosystem for everyone.

Despite their good intentions, many banks have still been penalized for non-compliance — highlighting the challenge of meeting the multitude of regulatory demands. UAE banks faced sanctions for lending to blacklisted borrowers, a Belgian bank was fined €15 million for weak AML controls, and a German bank paid $186 million for deficiencies flagged by the Fed. These cases highlight the ongoing challenges financial institutions face in navigating a complex regulatory landscape.

Simply put, compliance is complex and it takes a long time to ensure that all aspects are addressed. To further complicate matters, given the rate of change in the economic environment, regulation changes frequently and there are usually deadlines involved. 

This article explores some of those complexities and provides a blueprint for building an efficient and effective approach to regulatory compliance.

Exploring the root causes

One major challenge, when it comes to compliance, is the sheer complexity of the technology landscape at most financial institutions — often exacerbated by mergers and acquisitions. Amid that web of systems, it can be hard to trace the impact of new regulations across each piece of the puzzle. 

Further challenges include understanding how regulations translate into action within the system. Compliance delays often stem from complex people and process changes, not only technology issues. Understanding the ripple effects and gaining internal approvals eats up the most time. Here, clear lineage tracking of data and streamlined validation processes can be game-changers.

Moreover, the typical approach to setting up compliance systems makes them hard to change down the line. That’s because they are built into existing operations instead of being designed as separate, adaptable services.Compliance requirements are forced to squeeze into these rigid structures, making updates and adjustments a laborious endeavor. Many financial institutions struggle to test their compliance, because of the number of systems involved and the difficulties of getting a single view across all of them.

Fueling this fire is the fragmented data landscape. Data, the lifeblood of compliance, sits locked away in silos, each with its dialect and definition. The lack of a unified, reliable source of truth hinders the ability to accurately assess risk and demonstrate compliance, leaving institutions vulnerable to regulatory missteps.

Tackling these root causes

Let us see how these root causes can be addressed:

Compliance as a Platform

"Compliance as a Platform" is an approach where all compliance capabilities reside in one platform, which provides observability, traceability, reporting and auditing of compliance. This introduces a new way of operationalizing compliance in financial organizations, which empowers financial institutions by centralizing compliance capabilities. This means every business unit can leverage these capabilities within their customer journeys and business process flows for both IT and Operational compliance.

Auditing and reporting become seamless by eliminating data silos. Real-time observability and traceability, from top-down to bottom-up, facilitate swift impact analysis of new regulations or modification of existing regulations and fosters so-called "Compliance by Design”.

This platform is built on established organizational compliance principles and guidelines, ensuring the discoverability of capabilities with secure access controls. Importantly, federated data governance integrates compliance with regulations, while offering a plug-and-play infrastructure for business units like retail, corporate, lending, and deposits. It goes beyond traditional testing with stress testing and offensive/defensive approaches, transforming compliance from a burden to a foundation for a future-proof financial institution. This platform essentially transforms compliance from a reactive function to a strategic enabler for the entire financial organization.

Why this remains a challenge 

It’s one thing for financial institutions to be aware of why they struggle to adhere to compliance; fixing things is another matter. Several additional factors contribute to their continued struggles:

1. Insufficient investment in compliance resources: Despite recognizing the importance of compliance, some institutions don’t allocate sufficient resources. This includes:

   • Personnel: Inadequate staffing within compliance departments limits the capacity to effectively monitor activities, analyze data, and update systems.

   • Technology: Lagging in adopting RegTech solutions can hinder automation, risk identification, and efficient compliance management.

   • Training: Inadequate training for employees, especially frontline staff, can lead to unintentional non-compliance due to a lack of awareness or understanding.

   • Mindset  A common misconception about compliance in financial institutions is that it's a burden. This mindset hinders its effectiveness in driving positive change, as compliance can strengthen risk management and build trust with stakeholders.

2. Resistance to change:

   • Organizational inertia: A reluctance to embrace new technologies or adapt existing processes can delay the implementation of effective compliance solutions.

   • Short-term focus: Prioritizing quick fixes over long-term compliance investments can lead to cutting corners and overlooking potential risks.

3. Fragmented compliance efforts: Compliance efforts may be scattered across different departments without a centralized & holistic approach. Lack of coordination leads to inefficiencies and gaps in compliance coverage.

Addressing these key reasons requires a shift in mindset and approach:

• Prioritize compliance as a strategic imperative. Invest in resources, technology, and training to build a robust and adaptable compliance framework.

• Foster a culture of compliance. Promote transparency, accountability, and open communication within the organization.

• Embrace continuous improvement: Continuously review and update compliance processes and systems to adapt to evolving regulations and risks.

• Leverage technology: Utilize RegTech solutions to automate manual tasks, analyze data, and identify potential compliance risks.

Where to start

Start with a pilot where you can focus on three areas together: people, process, and technology seeing the holistic view and then slowly expanding the success to other areas. This pilot project should be either a new product or platform development for the business or modernization of any legacy system/application. For example, in a bank, if you are developing a new loan origination platform.

People

For this new loan origination platform, consider integrating a regulatory and compliance champion into the project team. This dedicated individual would foster regular communication with the compliance department, ensuring ongoing awareness and alignment throughout the project lifecycle. This approach breaks down silos and promotes a collaborative environment where compliance is viewed as a strategic advantage, not just a box-ticking exercise.

Process

"Compliance by Design" should be a core principle for all development efforts. From the start of the project, imagine how regulatory requirements can be seamlessly integrated into the process. This includes planning for future regulatory changes and ensuring their end-to-end traceability. Additionally, adopting a "left-shift" approach encourages embedding compliance principles from the very beginning of the project, rather than as an afterthought. This proactive approach streamlines the process and minimizes compliance roadblocks later on.

Technology

Technology plays a crucial role in streamlining compliance efforts. When developing new platforms or modernizing legacy systems, consider leveraging microservices architecture to establish clear boundaries within the system. Regulatory requirements can be abstracted out as traceable APIs. This approach creates a mini compliance platform within the project, allowing the compliance department to easily track and monitor adherence to regulations. This structured approach not only strengthens compliance but also enhances overall system maintainability.

Conclusion

In conclusion, navigating regulatory requirements in the banking and financial sector is a complex endeavor, with challenges ranging from technological intricacies to organizational culture. Despite the critical importance of compliance in fostering trust and stability, institutions often struggle to keep pace with the evolving regulatory landscape. Root causes such as opaque technology landscapes, lack of transparency, and resistance to change continue to impede progress.

To address these challenges, a shift in mindset and approach is imperative. Institutions must prioritize compliance as a strategic imperative, foster a culture of collaboration and innovation, and leverage technology to streamline processes.

By starting with focused pilot projects that integrate compliance seamlessly into people, processes, and technology, institutions can pave the way for a more efficient and effective approach to regulatory compliance, ultimately enhancing trust and resilience in the financial ecosystem.