In this extract from CUBE’s report, in association with Medici, we explore the challenges presented by regulatory change and ask what banks can do to effectively manage change.
The accelerating pace of regulatory change
Regulatory environments globally are becoming increasingly complex:
- 300+ million pages of regulatory documents will be published by 2020
- 600+ legislative initiatives need to be catalogued by a medium-sized, sell-side institution to have a holistic view of their rule book.
Global financial institutions must diligently monitor and implement change in three regulatory clusters: financial stability, prudent operations, and resolution.
The flood of revisions averages 200 per day – three times the rate in 2011.
Globally, banks are spending more than $270 billion a year on compliance and regulatory obligations, having on average 10–15% of their staff dedicated to compliance.
By 2021, regulatory costs are expected to rise from 4% to 10% of revenue, driven primarily by the sheer volume of regulations – each week sees an average of 45 new regulatory-related documents issued. The impact of this change on information governance in a financial institution is profound across all stages – data collection, data processing, data sharing, and data security.
The pressure of enforcement
As regulatory environments globally become increasingly complex, strict enforcement of new and updated guidelines leads to a highly prohibitive cost for even the simplest misstep, not mentioning misconduct.
Since 2008, many of the largest financial institutions increased their compliance staff 10X, yet are still consistently falling foul of the regulators, incurring fines. However, analysts today spend 90% of their time on data collection and organization, and only 10% on data analysis – an archaic disparity in talent and intelligence allocation, leading to mistakes.
While several large global banks have significantly increased the size of their compliance teams, manual processes are not scalable and sustainable anymore – banks can only go so far with throwing more people at a problem before they need to automate the processes to make them more efficient.
“If you look at the patterns in 2008, it was very reactive. Financial institutions increased their compliance costs and increased their compliance resources, but the volume of regulations just kept on coming, and you can’t just keep throwing people at the problem – that in itself introduces risks and inefficiencies. With technology, you can improve operational and commercial efficiencies.”
Rob Fulcher, CUBE
How banks can effectively manage regulatory changes
Manual processes are not only expensive and slow, but unable to provide the degree of regulatory intelligence required to tell organizations which regulations are relevant to their business, and how to avoid compliance gaps. If manual processes were effective, enforcement fines would not have exceeded $321 billion in the last five years.
“Regulatory compliance is mission-critical, and no bank can afford to get it wrong. The most effective damage limitation strategy is to leverage cognitive technologies to manage regulatory change at enterprise scale, and to view life as a three-way partnership between your financial institution, your RegTech provider and the regulators.”
Ben Richmond, Founder & CEO, CUBE
Ensuring compliance in a highly dynamic environment of banking regulation led to almost 15% of the sector’s workforce being deployed in governance, risk management, and compliance functions.
Meanwhile, investments in regulatory software can lead to an ROI of 600% or even more with a payback period of fewer than three years. Today, 770+ RegTech start-ups are operating around the world, 70+ of which are offering some of the most critical solutions for managing regulatory change – governance and regulatory reporting platforms, CUBE being one of them.