How compliance fundamentally changed the financial services experience

Regulatory compliance impacts front-office attention

The world of financial services is constantly changing. In order to adapt, those in the finance industry need to understand the paradigm shift caused by regulatory changes designed to improve investor protection, such as the impact of the EU’s MiFID II on investments globally.

In the wake of the financial market crisis, the desire to strengthen regulatory standards in the financial sector has created an unprecedented rise in the volume of compliance regulations. Previously, compliance mainly affected the back and middle offices. Now, new regulations are impacting the fundamental aspects of the revenue-generating process – investment services and the front-office, client-facing experience, an area once considered a private, unregulated matter.

The challenges of ever-growing compliance

Adapting quickly to regulatory changes is key

New and changing regulations result in a considerably greater burden on the front-office and back-office. The front-office costs, legal risk, and time required for delivering front services to clients have increased quite significantly.

With the pace of regulation updates, the need for more manpower is a potential financial toll for financial institutions. Legal and compliance teams would have to grow by one-third to stay up to date and continuously remain compliant. But financial institutions also face the challenge of how to effectively measure compliance and ethics as these new types of regulations must be put into practice through a very precise process including mandatory information, which checks must be applied to the whole value chain, and what the related costs of the services are. Given the continuous evolution of these regulations, it is clear that this trend will continue and become more rigorous.

Figure 1: Expected change in the size of the compliance team over the next 12 months

Over the next 12 months I expect the size of my compliance team to…

Source: Thomson Reuters. Cost of Compliance 2019: 10 years of regulatory change (2019)

Figure 2: Expected growth in the total compliance budget over the next 12 months

Over the next 12 months, I expect the total compliance team budget to be…

Source: Thomson Reuters. Cost of Compliance 2019: 10 years of regulatory change (2019)

Each year, the financial industry faces growing economic challenges as they need to deliver services that have become more complex, and that require more advanced in-depth knowledge. But it is important that the economic burden is not passed onto the client. Therefore, financial institutions need a quick and seamless integration of new business regulations into their systems. Included in this system should be:

  • Use of a business rule engine to embed compliance rules for the main front-office offering tools

  • User-friendly digital platform and a business rule engine specifically for compliance matters

  • Sophisticated data platform to support management in detecting trends, and opportunities by applying new technologies like machine learning, natural language interpretation, pattern detection, etc.

Figure 3: Weekly average time spend (in hours) on tracking and analysing regulatory development

In an average week, how much time does your compliance team spend tracking and analysing regulatory developments? (in hours)

Source: Thomson Reuters. Cost of Compliance 2019: 10 years of regulatory change (2019)

To remain competitive in the future, financial institutions need to support management in detecting trends and opportunities. By concentrating on innovative technologies like machine learning, natural language interpretation, and pattern detection, this will allow wealth managers to focus on clients without the burden of time-consuming back-office processes.

Build a trusted network for compliance

Staying up to date with compliance support and solutions

At Avaloq, we believe that an entire financial institution, including both the front and back-offices need to become and remain compliant with the regulatory environment. Therefore, a two-prong approach is needed – a network to deliver early warnings and high-quality solutions for the compliance changes identified.

To provide the best possible compliance support for financial institutions, now and in the future, we have invested heavily in front-end solutions and data analytics. To steer financial institutions in the right direction around compliance matters, our advanced analytics solutions detect and control legal risks. To continue to lower the actual burden on compliance staff, our comprehensive BECM and BPaaS newsletters tracks changes in regulations and industry standards and proposes practical solutions.

If you would like to hear more about how Avaloq can help support with Compliance, get in touch.

Our roadmap

Continuous improvement of our solutions – for the near and long term

Avaloq’s strong commitment to support banks in their adoption and integration of financial regulations requires a strict delivery plan. Depending on the item, different strategies may be applied, particularly for items that can heavily impact the value generation chain. Avaloq is investing heavily in front solutions with the aim of providing users with the best possible support for compliance. We continuously have discussions within our network of financial institutions to fine-tune the best solution options with the users in question.

Avaloq is working on different regulatory support activities, which include:

  • EU CSDR (Central Securities Depositories Regulation): indirectly impacting banks that work with EU CSDs

  • EU PSD II (Payment Services Directive II): opening up the payment business in Europe by establishing common technical standards for the execution of account access services and payment services

  • (L)ibor substitution: the most-used interest rate average currently is likely to be dismissed; this change will have a major impact on bank products, but also on Avaloq’s interest calculation engine

  • EU GDPR (General Data Protection Regulation): already in force for over a year; Avaloq is committed to delivering more user-friendly functionality

  • EU EMIR (European Market Infrastructure Regulation) refitted: implementation is focusing on simplifying derivatives trade repository reporting

  • EU SFTR (Securities Financing Transactions Regulation): securities financing transactions (securities lending/borrowing, repo) must be reported to a trade repository

  • EU TARGET2 (EU real-time gross settlement system): introduction of ISO 20022 messages in B2B payments

  • ESG (environmental, social, governance): support for ESG client preferences in the investment proposition (MIFID II amendment under discussion)

  • EU AML V (Anti-Money Laundering V) regulation: adhering to the latest FATF/GAFI recommendations, extending control on crypto assets and other new financial products

  • EU Benchmarks Regulation: imposing a standard for indices used as benchmarks in the financial industry

  • EU MCD (Mortgage Credit Directive): requirements related to residential mortgage offering

  • Eurex Trading and clearing new release support

  • UK switch to ISA (Individual Savings Account) and JISA (Junior ISA) subscription limits for the new tax year (ISA 2.0): revised tax treatment

  • EMIR solution (standard with Regis-TR as trade repository): is maintained and updated as soon as Regis-TR publishes the specifications

  • SFTR (Securities Financing Transactions Regulation) reporting

  • CSDR (Central Securities Depositories Regulation): Including for example a solution to ensure settlement discipline

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