1. Eliminate Manual Processes with Built-In Compliance by Design
8 min read

Eliminate Manual Processes with Built-In Compliance by Design

“Global spending among banks on compliance alone reached almost $100 billion in 2016, growing from 15% to 25% annually over the past four years.” -The Trade News

There are 1.4 million paragraphs in the revamped version of the EU’s ‘Markets in Financial Instruments Directive’ (MIFID II) – making it a tad over 7,000 pages long. That’s roughly seven times longer than Tolstoy’s War and Peace. Staggeringly, MIFID II is just one of 80 regulatory reforms that came into effect since the 2008 financial crisis, demanding more transparency, reporting and collaboration in the design and sale of financial products. Meanwhile, in the USA, there are rumours that the Dodd-Frank Act, which spells out numerous financial provisions over its 2,300 pages, is about to be amended significantly.

Crucially, MIFID II introduces the principle of ‘Product and Sales lifecycle’ – something that’s already well-established in other industries such as aeronautics, automotive and life sciences. Our industry is clearly behind the times. 

“To manage product and commercialization lifecycles, these industries have put in place built-in compliance by design.  This involves collaborative approaches that are efficient, help to handle the complexity of development, manufacturing and distribution of highly regulated products, and enable adoption of a global strategy for the whole product lifecycle.” Explains the whitepaper ‘MIFID II: opportunity or constraint?’

“In the aeronautics industry, for example, an aircraft is subject to certification throughout its development cycle. Product lifecycle management records and manages the process from the early architectural design stage to how the product is manufactured, operated and maintained. It also considers how information is recorded from operations, tracing and demonstrating development throughout the process. This provides greater security and protection of the ‘consumer passengers’. These activities are so important that they account for 20 percent of the non-recurring development costs for an aircraft program.”

It’s time to catch up

So now it’s our turn. These regulations are clearly overdue and serve an honorable purpose: to offer greater protection for investors and more transparency into all asset classes. But they do present a major headache for compliance departments around the globe and the way they manage data.

What’s more, over the next few years, even more expensive regulations with indisputable deadlines will come into being, building on the ones before. The cost – in both cash and time – of meeting their combined demands using current practices would be even more exorbitant than they are now.

“The average bank spends approximately 40% to 60% of its change budget on regulatory compliance – but squanders a significant portion of this investment on inefficiencies. As regulations continue to expand, companies need to fundamentally change their approach.” So says the article When Agile Meets Regulatory Compliance’ by Norbert Gittfried, Dr. Erik Lenhard, Walter Bohmayr and Claus Helbing.  

They’ve hit the nail on the head. Many organizations are still working with disjointed technologies and processes across departments and geographies. Their investment management relies on manual processes that hamper collaboration, innovation and product governance. That’s why financial institutions often outsource their compliance workload to law firms or consultancies, hiring enormous teams on equally enormous wages to handle projects. But even then, compliance is not guaranteed.

The mistake they are making is in treating change – and the way their business adapts to it – as the exception not the rule. Change should be considered ‘business as usual’.

They should put in place permanent but flexible processes – embedding governance and control in the business culture, not hired in on a random basis. This should then be supported by a sustainable platform that can be updated to fit future regulations as laws evolve. A digital platform that has the agility to deal with regulatory changes such as product revision.

Don’t talk about the future – change it

Digitization of Asset and Wealth Management : Promise and Pitfalls

Integrating digital technologies throughout businesses improves efficiencies, increases transparencies and reduces operational costs.

That’s the theory but as the whitepaper Digitization of asset and wealth management: promise and pitfalls’ points out, the reality is a bit different: “Lately, much has been written about the revolutionary potential of digital technology... But there is little information available on the actual practices on the ground. The rhetoric of technology has run ahead of reality. It’s time for a stock take.”

“Senior executives have become preoccupied with the day-to-day running of the business (cited by 48% of the respondents), while there has been inadequate forward spend on digital skills (38%) and regulatory issues have been slowing things down (35%).

In particular, the day-to-day pressures on senior management have been all the more intense, at a time when investment returns remain driven more by politics than economics due to central bank action. When business leaders are always fighting yesterday’s problems, it is hard to get on the front foot and envision a new future.”

But, whatever the excuse for not doing the right thing, it still has to be done. So, what’s the next step? The same whitepaper points out that digitalization in itself is not the be all and end all. It is simply an enabler in the delivery of business strategy.

“Without a clear strategy and a group of far-sighted people committed to deliver it, no digital tool can make much difference – no matter how sophisticated.” Its interviews with money managers who were early adopters of digitalization confirmed one truth above all others: “Strategic change is as much about mindset shifts as about bright business ideas or shiny new gizmos.”

Examples worth following

Fortunately, there are some glowing examples of companies who have the correct mindset – recognizing the new regulations as an opportunity to modernize their referential and product governance. They are honing their processes, investing more than lip-service in their existing IT systems, and embracing software solutions that can manage the entire product lifecycle and provide built-in compliance by design. It is bold companies like these that are lighting the way for the rest the industry.

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BNP Paribas Securities Services Paris is one such example.

In response to the evolving and increasingly complex regulatory system, it chose Dassault Systèmes’ 3DEXPERIENCE® platform and its Innovation Factory industry solution to accelerate ideas to sale with end-to-end product management.

We need to develop products that comply with new regulations and meet customer expectations

“A PLM approach helps us structure our offering while keeping operating costs in check… We are pioneering the use of the PLM technology that has been so successful in traditional industries, such as the aerospace or automotive sectors, to design and market new, across-the-line financial instruments.”

Innovation Factory provides BNP Paribas Securities Services with its own tailored dashboard that displays internal and external data: product ideas from its clients, partners and employees around the world; market, competition and regulatory data; up-to-date product data; client proposals and associated Requests for Proposal, as well as profitability, billing and contractual information.

The result? “We have a consolidated, instantaneous view of each project and its evolution over time… 360° traceability.” Said Philippe Ruault, Head of Clearing, Settlement & Custody Products.

Reaping the rewards of change

The big bonus for companies that follow this route, is that they will succeed in doing much more than simply complying with regulations. They will streamline their global collaboration, redeploying existing services to develop new products – while ensuring that these products are regulation-compliant – and improve their competitiveness by reducing time to market. They will also be able to capture insights from the market, thereby improving client communications and better targeting innovations to meet client needs.

So, what should be on their solution shopping list?

Multi-disciplinary collaboration across one integrated platform is the basic ‘must-have’. This will break down the silos between people, processes, data and systems.

And, in addition to automating regulatory rules enforcement, it’s important to maximize the reuse of information via well governed, templatized processes.

Companies also need to establish internal processes and controls to perform comprehensive due diligence and ongoing assessments of service providers. Such a controlled, process-based culture can massively cut compliance costs.

Furthermore, the capability to gather, align, enrich and most important of all, interpret Big Data will provide valuable information and customer insights. All of which should be delivered in a user-friendly manner – ideally by real-time dashboards and analytical views of the entire product lifecycle.

With this in place, regulatory changes can, at last, be treated as ‘business as usual’. So instead of starting from scratch with each new reform, these businesses will be able to maximize the re-use of information, build on already-established processes and templates to automate their obligations to regulators and investors – improving transparency and accountability. What used to take weeks in tedious manual entries and random sampling will be completed in megabytes per second, freeing up time to be invested more profitably.

The human factor

There is an important postscript. However fine the technological tool, its effectiveness depends on those who wield it. Which is why it’s just as important to have the right team in place as the right systems and software. The article When Agile Meets Regulatory Compliance’ puts this consideration before all else in the successful promotion of an agile compliance model for financial institutions. In fact, there are five steps:

  1. Create your core team: A small but fully dedicated core team of experts can work effectively, drawing on business and IT resources only when needed.
  2. Prioritize and groom the backlog: Companies must prioritize the top 20 or 30 items in the backlog. By doing so, they can quickly build an end-to-end plan for incremental delivery.
  3. Divide requirements into clearly identifiable pieces: By breaking down regulatory requirements into clearly defined, manageable chunks that can be delivered independently, teams can continually deliver key portions of the requirements rather than attempting to deliver the entire project in one massive push.
  4. Stay in sync with the regulator: Knowing which regulatory requirements to implement and in what order can be difficult. Teams should strive to quickly create a minimum viable product, test it, learn what works, and iterate until it meets the requirement.
  5. Generate trust by maximizing transparency: This starts with board members, who must understand why and how agile is used in regulatory projects and fully support the approach. It also requires trust among employees, who must work collaboratively to resolve challenges. Finally, it requires trust across units, so teams can work collaboratively toward the same overarching goal without fear that other units will pass the buck. 

Get that right and your built-in compliance by design shopping list is complete. You’ll be on your way to proving your commitment to providing innovative, fully-compliant products and solutions that are in the best interests of your customers and therefore, your business.