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5 Ways Treasury Can Navigate the Regulatory Landscape

  • By Amit Agrawal
  • Published: 8/12/2015
navNavigating the compliance, regulatory and operational risk landscape has, without doubt, become the biggest headache for corporate treasurers around the world since the 2008 financial crisis. The pressures aren’t likely to ease any time soon, given the ongoing widespread compliance failures over the past 12 months.

Gazing back through 2014, one can only be but amazed at the amount of regulatory reform and gains made, despite widespread skepticism and intense industry blowback. Among the key achievements last year was the successful deployment of Basel III across the European Union (EU) and other reforms emanating out of the European Commission. These have paved the way for a reduction of systemic risk through measures related to the safety and soundness of both banks and market infrastructure and to the effective resolution of failing banks; advancing the wholesale and retail conduct regimes; and setting out the supervisory stall for assessing risk governance, risk culture and risk data.

Looking forward to 2015 and beyond, it’s apparent that reforms to date constitute only the beginning of a long journey ahead. Both the United States and the EU continue to issue forth with further reforms, compounded by new initiatives emerging from the G20 gatherings and the Basel Committee in Switzerland. All of this fuels further uncertainty, thus making it difficult for institutions to plan ahead and allocate resources.

Avoid over-complexity

As the Basel II compliance process demonstrated prior to the onset of the 2008 financial crisis, corporate treasurers need to ensure that large, wholescale regulatory change programs running in corporations take a firm-wide, business-focused view. Any operational and technology change should run in tandem with business model reviews to enable a more structured, effective and cohesive outcome that helps avoid over-complexity.

Exponential investment

Risk and regulation continue to demand large-scale technological investment to comply with the new environment which treasurers cannot avoid. Chartis forecasts that global risk IT expenditure in financial services will rise by 14 percent and exceed a spending level of $30 billion by the close of 2015.

The highest growth in spending is expected to be amongst the Tier 1 corporations, many of which remain firmly in the crosshairs of regulators and enforcement agencies. It’s expected that these firms alone will increase expenditures by some 24 percent compared with 2014 outlays, whereas other types of corporations are expected to increase expenditures by 9 percent and 10 percent respectively, according to the Chartis research. In total, it was estimated that financial institutions in the U.S. invested more than $28 billion on automated risk management and regulatory IT systems during 2014, and that this figure is expected to rise to nearly $32 billion through 2015.

Centralization

Another pressing concern for corporations is their centralized risk/compliance operation model. Outsourcing and shared services is a more than two decades-old strategy to improve back-office efficiency. Corporate treasurers use different operational models and approaches for this method to work consistently. Each model has its own set of merits/demerits and thus it is vitally important that operational models be aligned with the organizational strategy.

It’s expected that outsourcing will reduce in relevance as more and more businesses move to more centralized operational models, aligning them with the rest of their business to better manage risk and make efficiency savings, thus driving down overall costs.

People of the right caliber

Corporations need to ensure they hire the right people for the job. Although timelines for the implementation of new requirements are strict and aggressive, properly addressing this challenge requires assembling the right team of experts with a sound understanding of compliance, firm-wide risk requirements, process excellence and technology capabilities.

This is of particular importance as focus shifts from defining the regulatory response to implementation and execution. While there remains a vital role for compliance in interpreting new regulatory requirements, this should not be to the detriment of building a true change capability. Nearing the finish line, our final area of concern is that all-encompassing one of infrastructure and infrastructure redesign.

A clear strategy

Corporations dealing with the current high volume of regulatory reform must turn their current challenges into opportunities to drive strategic change. By moving away from a short-term, fragmented approach to implementing regulatory change programs, and building a clear strategy that uses process improvement as a means to achieve compliance, treasurers can begin to reduce the complexity and cost of their response to the new regulatory environment.

Amit Agrawal is vice president Asia for AxiomSL. The views of this article are solely those of its author.



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