Turning regulatory change into a strategic advantage

Ryan Davis (Associate Partner) and Célina Amrane (Consultant) at Avantage Reply Luxembourg. (Photo: Avantage Reply Luxembourg)

Ryan Davis (Associate Partner) and Célina Amrane (Consultant) at Avantage Reply Luxembourg. (Photo: Avantage Reply Luxembourg)

The banking industry has borne witness to constant regulatory change, which has intensified since the 2008 economic crisis. European banks must meet more and more regulatory obligations and be able to adapt quickly and efficiently. Avantage Reply has been supporting institutions not only to ensure compliance with regulatory requirements, but also to let them take advantage of strategic opportunities.

Adapting to regulatory obligations is a strategic challenge for banking institutions. Recently adopted regulatory requirements are varied, impacting banks at several levels (BCBS 239, Covid-19 reporting, stress testing requirements, climate change risk, CRR II, etc.). Banks must be able to adapt internal systems and processes as efficiently as possible to ensure that they are implemented in the most optimal way.

Banks should focus on four key areas in order to do this:

1.     Flexibility in adapting to new regulatory requirements,

2.     Understanding of the key business impacts that new regulation might have,

3.     Vigilance in ensuring continuous compliance with new and existing rules,

4.     Access to complete, good quality data.

The most successful institutions go beyond simply aiming to comply with new rules and instead seek to adopt regulations intelligently to gain a competitive advantage.

With regards to flexibility, it helps to have efficient internal systems and processes. This requires a significant investment in resources, including upskilling existing staff and implementing a lean organisational chart with a rationalisation of reporting lines. Equally important, strong IT infrastructure which focuses on cross functional access can also help to ensure that new regulations can be adopted quickly and efficiently.

Adapting and taking advantage of regulatory change can only be achieved if a bank has a strong understanding of its business model and the competitive environment within which it operates. To understand the impact that a new regulation may have on the current business model, it is necessary to carry out a constant assessment and reassessment of the business model. These assessments should be cross functional and look at how the institution can take advantage of regulatory and market conditions to gain a competitive advantage.

To ensure continuous compliance in a changing regulatory environment, it is important to be vigilant and invest in the right skills across the three lines of defense. Anticipating regulatory changes and having the ability to prioritise the use of resources to implement changes can ensure that competing regulatory pressures are adequately managed.

Access to complete, good quality data can be ensured through optimising data capture and storage. Having a single source of internal and external data which is fully reconciled across Risk, Finance and business functions can be a significant differentiator in an industry which is often hampered by the prevalence of legacy IT systems and data gaps. Strong data governance, data lineage in line with BCBS 239 requirements and good IT infrastructure is paramount. Leading institutions have a dedicated data quality team which ensures the availability of good quality, accessible data.

More specifically, what can institutions do in order to move towards better, more efficient regulatory compliance? We see five concrete actions that banks can take today in order to derive these benefits.

1.     Improving regulatory engagement and proactively managing the bank’s relationship with its regulators.

2.     Being commercially oriented by going beyond simply complying with regulatory requirements and instead adopting a more business focused mindset to compliance. For example, a regulatory evolution in capital requirements should be assessed from a commercial perspective to ascertain whether the current business model can be adapted to take advantage of new opportunities.

3.     Constant staff upskilling through investment in both technical and non-technical training programmes.

4.     Investment in IT resources to create a “centre of excellence” for IT, incorporating a flexible and modern IT infrastructure.

5.     Strong, centralised Project Management to drive business transformation and change management programmes following significant regulatory changes.

Implementing the above changes can go a long way towards being more strategic with regulatory compliance, allowing an institution to take advantage of regulatory change to build competitive advantage.

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