Find Your Edge: Maximize Efficiencies, Empower Innovation
(There are 1.4 million paragraphs)
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?’
(There are 1.4 million paragraphs Part 2)
“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.