Catch Me If You Can – How regulation can add real value
The aftermath of the financial crisis has brought about a new regulatory landscape, creating disruption and chaos in its wake for the Finance function.
The intensity of the shifting environment has pushed the Finance function to react to large swathes of Finance driven regulatory change. However it is crucial that regulation is seen as an enabler for strategic enhancement rather than as a necessary evil. The challenge lies in moving Finance change initiatives beyond satisfying regulatory requirements to a point where it can harness the change to benefit banks holistically.
Regulation – the double edged sword
With an average of 110 regulatory changes tracked every day in the third quarter of 2013 (source: Thomson Reuters), the magnitude of change, coupled with the stringent compliance deadlines, has been daunting. Consequently, it does not come as a surprise that largely banks have tackled regulatory change as a box-ticking exercise.
Banks find themselves in a difficult situation as regulation not only triggers higher costs but also can limit innovation, profitability and growth. According to CitiGroup, about half of the bank’s $3.4bn efficiency savings were spent on additional investments in regulatory and compliance activities. And, CitiGroup is only one example amongst many others.
“Two little mice fell in a bucket of cream. The first mouse quickly gave up and drowned. The second mouse, wouldn’t quit. He struggled so hard that eventually he churned that cream into butter and crawled out.”
-Frank Abagnale Snr. (Catch Me If You Can, 2002)
As regulators continue to challenge the sustainability of banks, the current approach looks anything but forward driven. Like the two mice, banks have two options with two very different outcomes:
- Continue to drown in the costly and siloed approach to accommodating regulatory requirements; or
- Develop a long-term integrated approach that leverages the benefits from regulatory change and derives value across the entire business
Change in perspective = added value
The recent regulatory landscape has had a large impact on the operations of the Finance function which puts it in a prime role for driving the change agenda. A focussed transformation to the Finance function that aligns the regulatory framework with the operating strategy, and develops processes which proactively support change expectations, will allow Finance to act as an enabler for regulatory change and facilitate the strategic growth of the bank.
Developing a long-term strategy to successfully integrate regulatory demand is not unattainable. Take stress testing as an example. Currently, regulatory imposed stress tests are generally only undertaken to ensure the regulators are satisfied. But imagine if the processes implemented to conduct the stress tests, and the results produced from them, were used to inform management of the feasibility and financial implications of business decisions. With a change in approach the bank could quickly move from ticking boxes to finding some real business value from regulatory change.
Another example can be found in regulatory reporting, which requires large quantities of data to be gathered – a task that banks have not traditionally been well set up to manage. The process could produce a rich set of metrics which, when analysed beyond the regulatory requirement, could be used to draw conclusions on how to improve business performance.
Transformational focus should lie in developing processes which enhance functionality and performance beyond regulatory compliance, rather than tactical solutions which grind to a halt once the regulatory requirement has been fulfilled.
The possibility to add value to regulatory change is within every Finance function’s control. By transforming regulation into competitive advantage, a bank can be one step ahead, or fall behind if they don’t. And in the words of Frank Abagnale Jnr. (Catch Me If You Can, 2002) “You’re gonna have to catch me first!”