The spate of financial crashes and meltdowns in the recent past point to the one universal truth about the financial services industry: corporate governance matters. A direct outcome of the 2008-09 financial crisis was the introduction of a series of regulations and compliance requirements. And justifiably so. Ensuring the stability of the broader financial ecosystem is vital to the smooth functioning of all businesses – big and small. International regulatory bodies – IAIS, OECD, FASB, Basel Committee, and so on – have instituted several standards realizing the need for improved governance, effective risk management, and better distribution of responsibilities among stakeholders.
Plagued with business uncertainties, the financial services industry is witnessing increased compliance costs, disinvestments of lines of business, and shrinking profit margins. Market reform and regulatory changes are key to identifying deficiencies and gaps in the financial ecosystem, thereby bringing in much-needed stability. Financial institutions are therefore according top priority to regulatory compliance and including this aspect in their growth strategies. So, instead of being just one of the many business functions, regulation and compliance management is fast becoming a business enabler.
Financial firms need to manage a host of regulatory requirements both at regional and global levels. This has resulted in a steep increase in the cost of compliance, forcing firms to explore opportunities to reduce their operating costs. Consequently, they have begun to adopt new operating models by centralizing non-core processes, automating operations, and so on, for long-term sustainability and cost reduction.
Firms are embarking on several transformational initiatives, primarily focusing on these five themes:
- Achieving economies of scale through centralization of services, enabling better asset utilization
- Exploring internal synergies by consolidating systems and integrating operational centers
- Reengineering or retooling business processes for organizational agility
- Reducing complexities through rationalization and consolidation of infrastructure, systems, and applications
- Digitizing operations to drive process transparency and auditability, to effectively engage both customers and regulators
To build agile, customer-centric, robust, and nimble organizations, financial firms are looking to replace legacy infrastructure with new, sophisticated systems built on advanced technologies. Firms are centralizing some of their functions to achieve economies of scale, and partnering with vendors through shared service models to further drive down costs.
We believe that financial firms need to continually seek opportunities to align with regulatory changes, both at tactical and strategic levels. This will not only help them ensure timely compliance, but also bring to the fore tangible business benefits. Regulations therefore have more to offer than we think. Financial firms must tap into the regulatory potential to seek opportunities for innovation, business simplification, and organizational agility – all of which are defining the new normal for the industry.