5 Key Areas Of Compliance In Banking

Hybrid Work Environments

With the banking sector starting to return to some form of normality, it has become apparent that big decisions are being made about new ways of working. With the UK and much of the world witnessing mass branch closures, many are considering what the new work environment will look like both internally and externally.  COVID-19 has pushed the retail banking sector to embrace digital channels (some would argue they were doing this already). Employees obliged to work from home initially raised productivity concerns from big banks and FS but has since been proven incorrect as people working in a hybrid model works and works well. As a result, many organizations are considering making hybrid/flexible arrangements permanent.

Just recently, Deutsche Bank announced plans to close 150 branches by year-end and give 90% of its employees the option to work from home three days a week. This was cited as both a cost-cutting measure and a way to keep pace with changing consumer habits.

Remote work, however, introduces an extra level of compliance complexity for banks and they have had to adapt quickly to evolving restrictions imposed by the FSA. In recent reports, a number have been cited as failing compliance requirements, including Monzo,  Regulators scrutinise Monzo as revenue and losses grow. This has meant that banks have had to revise internal company processes and procedures to include remote work. Making work-from-home a permanent option will likely require a full policy review, particularly about safeguarding sensitive information away from the office.

In the UK, banking compliance includes GDPR requirements, which has caused much greater complexities, especially to onboard a new customer or merchant. The ICO has already issued guidance and security checklists on how organisations can better protect data remotely by identifying typical IT vulnerabilities.

Long-term issues, such as virtually managing employee personal development or monitoring their health and well-being, must also be addressed. Compliance managers will want to be involved in the communication process to ensure relevant policies and procedures are clear and on point.

Regulatory Change

There is no doubt that the COVID pandemic has fuelled regulatory change. With remote working, digital banking, and less cash being used, banks must now also consider political disruption in Europe from Brexit and the new administration in the US. Personnel changes under Joe Biden’s administration in key regulatory agencies will likely reverse many Trump policies and tighten banking oversight in general. European financial services companies also should prepare for new regulations in relation to UK/EU trade agreements.

Globally, the political landscape has changed over the last few years, and the pandemic has meant greater scrutiny on how banks manage their customers and their money.  Anti-Fraud has always been a key area, but with new compliance regulations, it has become more complex, with some instances of it taking banks 2 to 6 weeks to onboard a new customer, when it should take no more than 15 minutes.

Stricter and more complex regulatory requirements, as well as associated processes and controls, will mean banking compliance officers will want to keep a closer eye on current regulatory obligations. But that’s only half the battle when it comes to managing banking compliance.

Regulations require large amounts of data and documentation from multiple policymakers. You must be able to translate that information into action to update relevant organizational processes, controls, and policies- failure to do so can lead to large fines. This is where effective Digital Transformation with automated workflows and API-driven compliance checks have become a key process for any bank, the longer it takes to onboard a customer the less likely they are to stay a customer.  Along with that, customer journeys are also a driving factor in compliance as they have become interwoven with each other. Compliance has shifted from the middle and back-office and into the front office as well.

Accountability Requirements

Personal accountability has become a high priority for regulators seeking to stem misconduct, fraud, money laundering and embed risk-aware cultures into banks. Singapore is one of the latest in a long list of jurisdictions to introduce measures that will strengthen accountability and conduct requirements of senior banking executives.

Even in regions such as the US, where there are no specific accountability requirements, organisations are beginning to see the value of a structured system of record and accountability relating to conduct rules. Surprisingly, the US banking system is a few years behind the UK and Europe for technology-driven initiatives.  Spelling out the rules defines employees’ compliance responsibilities and helps enforce other regulations across the organization.

Banks, however, should not view accountability regulations, such as the Senior Managers & Certification Regime (SMCR), as a box-ticking exercise. Some, including myself, would argue they used to, I have even had a senior exec at a Tier 1 global bank tell me “compliance was simply a box-ticking exercise”, for the compliance team. Banks should consider accountability regulations as an opportunity to strengthen organisational culture and improve integrity which, was heavily dented after the financial crisis.

Digital Transformation

Again, COVID has been a driving factor and has driven digital transformation projects in banks forward by at least 2 years and across the financial services sector. Consumers are now embracing digital platforms to access products and services, which has pushed technology to the forefront of the strategic agenda for many banks. This has led to them implementing projects to digitise and automate their middle and back office, rather than just having a “shiny front end”.

Digital transformation is still a relatively grey area when it comes to banking compliance, with no one-size-fits-all approach as to how it should be regulated. The story is different today. Regulators are struggling to keep up with the pace of digitization, especially around areas of machine learning, artificial intelligence (AI), and big-data analytics.

Rip and Replace does not work. Due to the millions previously spent on systems and processes, the requirement for a PaaS (platform as a service) solution providing digital innovation and ‘intelligent glue’, gifting regulators time to adapt without disrupting the markets, is too much.

A successful digital transformation program also requires good overall data governance and risk management. Aligning people, processes, and technology into a data strategy is fundamental to success.

Compliance Costs

One reason why banks have been so slow to implement change is that compliance is a huge expense. Simply “keeping the lights on” requires enormous sums – and the cost of keeping up with accelerating regulatory change increases that amount year on year. According to a recent survey, operating costs spent on compliance have risen by over 60% for retail and corporate banks over the last eight years.

The cost of compliance is so great in fact, it can interfere with the ability to innovate, deliver customer value, and reduce operating costs. Decreasing spend on regulatory compliance is not something that can be easily achieved – especially when penalties for non-compliance remain high.

Reducing compliance costs comes down to your ability to increase the effectiveness and efficiency of the compliance management function, so it’s important to Invest in the right technology to automate processes. Automation not only drives down operating costs; it minimises your risk of expensive fines from non-compliance.

The challenges surrounding banking compliance are not likely to slow or reduce in the coming months or years. It’s up to compliance professionals to keep costs down – while successfully navigating the increasingly complex cultural and regulatory climate of the banking industry.

David Landi – Head of Asset Management


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