Treat Regulatory Compliance as an Opportunity, Not a Threat

Maintaining a Competitive Edge in the Banking Industry

Compliance professionals know it well: the organizations that embrace compliance and adopt a culture of ethics absolutely reap the benefits from a business perspective. John Freeman, Chief Legal Officer at Tata Communications, discusses why a positive approach to compliance is essential.

Regulatory compliance often conjures up feelings of “big government,” and it’s seen by many in the corporate world as a hindrance to doing business. In today’s day and age, however, the cost of noncompliance can far outweigh the costs of compliance. Thus, many executives begrudgingly treat compliance as a necessary evil – or table stakes to merely compete within their industries.

But for companies that treat regulatory compliance as an opportunity, robust compliance programs combined with a strong culture of ethics can serve as a competitive differentiator. In fact, one recent study suggests a significant correlation between effective ethics and compliance programs and a firm’s increased performance against their competitors, especially in stock price growth.

While the cost of compliance is no doubt increasing across industries, there is none so more impacted as the BSFI industry. Banks are some of the most highly regulated businesses in the world. U.S. and European regulators alone have levied close to $342 billion in fines on banks since 2009 for noncompliance (and that total is predicted to top $400 billion by 2020).  Banks continue to spend a substantial amount of their resources on regulatory compliance, and this will only continue to increase as the regulatory landscape becomes more restrictive and fragmented.

The sheer volume and complexity of these regulations will require banks to adopt a flexible and integrated approach to their operations and infrastructure so they can quickly adapt to the ever-changing market conditions and demands of their customers and regulators. The consulting giant Deloitte put the situation well in a recent article for the Wall Street Journal:

“Banking organizations need to keep moving forward as planned, with deliberate linkage between regulatory strategy; business strategy; and building infrastructure for governance, regulatory reporting and risk management that scales and is flexible. The good news is that many of the changes banking organizations are currently implementing make good sense from a business perspective — not just a regulatory perspective — and are worth doing no matter how the future unfolds.”

The point here is that regulations can be seen as both a carrot and a stick; and if we look at compliance through the lens of operational excellence, it is at least partially “de-fanged.”

In order to remain competitive, banks need to shift their approach to regulatory compliance from purely tactical to innovative-led solutions – looking instead at the entire end-to-end process of deploying flexible tools, systems and infrastructure to drive real efficiencies and increase compliance.

One of the main obstacles faced by many banks in implementing a seismic change to their compliance programs, however, is that they tend to be mature businesses that have accreted complexity in operations and systems over the years. Specifically, in IT, they will have pursued faster performance through successive generations of hardware and software. This will have led to overlapping programs, applications and services that can make finding that much-desired “single version of the truth” difficult to pinpoint, analyze and make informed decisions – and this will no doubt make any internal change a complex and time-consuming process.

Thinking Ahead

As banks continue to digitally transform their businesses, their data strategy and infrastructure must be inherently flexible, because the ability to securely manage and monitor vast quantities of data is critical to any compliance program. Banks must have the capability to feed data from many sources into centralized monitoring systems while maintaining the quality of data in terms of accuracy, timeliness and other factors.

One interesting opportunity for banks is to adopt adaptive IT systems and associated APIs, which will open up a whole new ecosystem of partners and business models. With the rise of the “API Economy,” in which firms plug in to off-the-shelf software and web protocols, many companies are adopting open architectures and reusable “low code” developer environments to bring speed and flexibility into their IT environments. It is also why many IT leaders are saying “no” to proprietary approaches that lead to vendor lock-in and restrictive core-architectures, which over time becomes a hindrance to a firm’s agility. And with open banking becoming more of a nomenclature in today’s digital economy, the ability of a bank to design their infrastructure and data sets to meet the demands of their customers, regulators and shareholders will be of utmost importance to their continued survival.

Compliance Without the Headache

I would submit that not many in the banking industry would willingly call out for more regulation, but for those CEOs, CIOs and others that have been charged with compliance, it is not uncommon to hear that they came out of what they initially perceived as Dante’s nine circles of hell with more control over the quality of their systems and their data and a more competitive business model poised to capitalize on the new digital economy.

So, when thinking about regulatory compliance, CEOs and CIOs should likewise consider whether their current systems and tools are creating roadblocks to or enabling their firms’ overall success.