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Embracing Regulation:
Achieving business success
through reform
Top Ten Challenges for
Investment Banks 2015
01
EmbracingRegulation:
Achievingbusinesssuccess
throughreform
01
2
Embracing Regulation: Achieving
business success through reform
Six years on from the beginning of the financial crisis, and
waves of regulation continue to reshape the investment
banking industry. A more highly-regulated environment
has become the new normal, and various estimates suggest
that low- to mid-teen RoEs achieved by Tier 1 investment
banks prior to the new wave of regulations could decline
on average by 5% as new rules are implemented. Major
reform programmes stretch into the horizon, and promise
to pre-occupy management attention and resources for
at least the next 5-10 years.
With regulation expected to impact
profitability significantly for the forseeable
future, the challenge for investment banks
is how to change their approach to
executing regulatory change, and recognise
the opportunities that are inherent within
it. Achieving business success through
regulatory reform requires more strategic,
less fragmented decision-making that
aligns itself with, and enhances, the
underlying business model.
A short-termist approach to
regulatory change
Investment banks have tended to be
short-termist and reactionary in their
approach to dealing with regulation,
pursuing regulatory compliance in an
inefficient manner that is frequently
misaligned with the long-term success
of the business. Compliance costs
continue to represent a significant
proportion of income (see Fig. 1) and
will continue to rise (see Fig. 2),
RoEs achieved by Tier 1
investment banks prior to the
new wave of regulations could
decline on average by
5%
3
Figure 1: % of group-wide net income spent on compliance risk management
Figure 2: Predicted % change in
compliance programme investment
over next two years
against a backdrop of lower revenues and
profitability across core businesses. Senior
industry figures report that as much as
70% of their variable investment budget
in 2014, and again in 2015, has been set
aside for regulatory reform.
The stringent nature of regulatory
deadlines is clearly a significant driver of
this approach, and something over which
banks have little or no control. That said,
there are also a number of internal
challenges at work:
• Governance
A decentralised governance structure
leads to distributed decision-making,
which is frequently misaligned with
budget allocation – the result is a
short-termist outlook which is subject
to individual agendas, and which may
be exacerbated by the siloed cultures of
different business divisions.
• Legacy systems
Tactical solutions to urgent regulatory
demands are often built on the back of
legacy systems, which are not fit for
purpose and which may require costly
maintenance to keep running.
• Headcount
When faced with regulatory challenges,
an automatic reaction for banks is to hire
heavily within compliance – 82% of
respondents in the Accenture Compliance
Risk Survey (2014) were either actively
investing in greater headcount or
planning to invest further. Without wider
changes to the operating model or
decision-making process, simply throwing
resources at a regulatory problem can
result in solutions that are unnecessarily
complex, inefficient and inflexible.
• Relationship with regulators
This has improved in recent years in the
face of the significant reputational and
financial risks posed by regulatory
breaches. However, after years of focusing
<1% 1 - 2.9% 3 - 4.9% >5%
70
60
50
40
30
20
10
0
• Overall • Europe • North America
Source: Accenture Compliance Risk Survey, 2014
• Increase < 10% • Increase 10 - 19.9%
• Increase > 20% • No change
Source: Accenture
Compliance Risk
Survey, 2014
4
Any operational and
technology change should
be run in tandem with
business model reviews.
Figure 3: Industry examples of process improvement
Operational Risk
Control
Know-Your-Client
T+2 Settlement
Cycles
Build better processes, not control
measures
Target the definition and implementation
of better processes that are inherently less
risky, rather than focus on adding controls
to close gaps and reduce the risk in existing
processes
Process Improvement Benefits
Less complex processes with reduced risk
•	Reduced operational risk
•	Reduced complexity: lowers cost
and makes processes more flexible
for future change
Business opportunity to monetise data
Large amount of information gathered on
clients could potentially be monetised in a
number of ways:
•	 Client insight, cross-selling opportunities
•	 Industry-wide KYC utility
Develop a co-ordinated global team
Deploy co-ordinated regional centres of
excellence with common processing and
infrastructure that can handle large volumes
Enhance straight-through,
exception-based processing
Focus on reducing touch points in the
settlement process through the use of better
technology, rather than expanding
Operations teams
Scalable solution that supports industry
best practice
•	 Compliance with CSDR regulations
•	Reduced settlement  liquidity risk for
clients is a competitive differentiator
Source: Accenture
Research
on revenue-generation at all costs,
investment banks are still playing
catch-up when it comes to balancing the
competing needs of clients, shareholders
and regulators.
A consequence of this approach is that
banks have addressed the complexity of
regulation with similarly complex
solutions. The response to Basel II is an
instructive example: having assembled, at
great expense, large infrastructures to
calculate capital requirements, many
banks have found that they are unable to
make appropriate business or accounting
decisions with systems which sit outside
of the day-to-day running of the bank
– this becomes a particular problem
during stress-testing exercises.
Building for the longer term
As the Basel II example demonstrates,
regulatory change programmes must
take a firm-wide, business-focused view.
Any operational and technology change
should be run in tandem with business
model reviews to enable a more
structured, effective and cohesive
outcome that helps to avoid complexity.
5
Investment banks dealing
with the current high
volume of regulatory
reform must turn their
current challenges into
opportunities to drive
strategic change.
When defining a regulatory strategy it is
also important to acknowledge that, to be
most effective, change must come from
the top and filter down through the
organisation. Banks must address the
problems caused by a decentralised
structure by simplifying and strengthening
governance frameworks. They must also
drive a more unified banking culture
across their lines of business, a strategy
which would confer associated benefits
for conduct and reputational risk.
Banks must also ensure they hire the right
people for the job. Although timelines for
the implementation of new requirements
are strict and aggressive, properly
addressing the 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 truly
business-focused change capability.
Re-focusing on process improvement
to drive regulatory compliance
Regulation has proven to be a powerful
driver of change in recent years, and is
likely to remain so for years to come. As a
result, a common challenge is that
regulatory change programmes invariably
jump to the top of the prioritisation
queue, often ahead of projects to grow or
enhance the existing business. We
encourage banks to see this as an
opportunity rather than a challenge: with
the right strategy in place, regulatory
change can be the catalyst for tangible
business benefits.
To do this successfully, banks must
recognise the symbiotic relationship
between process efficiency and
compliance, and build into the
foundations of every change programme
a clear view not only of the regulatory
imperative, but where it aligns with a
client or business improvement goal. This
is not an immediately obvious relationship,
but we believe there is a clear link between
achieving successful regulatory change
and driving process improvements. We
include a number of examples in Figure 3.
These examples illustrate how banks
can exploit regulation to achieve
business success, and turn the
inevitable focus on regulatory
compliance – in terms of budget and
management attention – to their
advantage. Furthermore, they
illustrate how process improvement
is an essential component of any
solution, helping banks to achieve
long-term compliance and true
business benefit.
Investment banks 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-termist, fragmented
approach to implementing regulatory
change programmes, and building a
clear strategy which uses process
improvement as a means to achieve
compliance, banks can begin to
reduce the complexity, and cost, of
their response.
About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company, with more
than 305,000 people serving clients in
more than 120 countries. Combining
unparalleled experience, comprehensive
capabilities across all industries and
business functions, and extensive
research on the world’s most successful
companies, Accenture collaborates
with clients to help them become
high-performance businesses and
governments. The company generated
net revenues of US$30.0 billion for the
fiscal year ended Aug. 31, 2014. Its home
page is www.accenture.com.
Accenture Experts
To discuss any of the ideas presented in
this paper please contact:
Chris Thompson
Managing Director
Capital Markets, New York
chris.e.thompson@accenture.com
+1 917 452 8982
Tomasz Walkowicz
Capital Markets Research, London
tomasz.m.walkowicz@accenture.com
+44 207 844 5542
Disclaimer
This report has been prepared by and is distributed by Accenture. This document is for
information purposes. No part of this document may be reproduced in any manner
without the written permission of Accenture. While we take precautions to ensure
that the source and the information we base our judgments on is reliable, we do not
represent that this information is accurate or complete and it should not be relied upon
as such. It is provided with the understanding that Accenture is not acting in a fiduciary
capacity. Opinions expressed herein are subject to change without notice.
Copyright © 2014 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.

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Top Ten Challenges for Investment Banks 2015: Regulation: Challenge 1

  • 1. Embracing Regulation: Achieving business success through reform Top Ten Challenges for Investment Banks 2015 01 EmbracingRegulation: Achievingbusinesssuccess throughreform
  • 2. 01 2 Embracing Regulation: Achieving business success through reform Six years on from the beginning of the financial crisis, and waves of regulation continue to reshape the investment banking industry. A more highly-regulated environment has become the new normal, and various estimates suggest that low- to mid-teen RoEs achieved by Tier 1 investment banks prior to the new wave of regulations could decline on average by 5% as new rules are implemented. Major reform programmes stretch into the horizon, and promise to pre-occupy management attention and resources for at least the next 5-10 years. With regulation expected to impact profitability significantly for the forseeable future, the challenge for investment banks is how to change their approach to executing regulatory change, and recognise the opportunities that are inherent within it. Achieving business success through regulatory reform requires more strategic, less fragmented decision-making that aligns itself with, and enhances, the underlying business model. A short-termist approach to regulatory change Investment banks have tended to be short-termist and reactionary in their approach to dealing with regulation, pursuing regulatory compliance in an inefficient manner that is frequently misaligned with the long-term success of the business. Compliance costs continue to represent a significant proportion of income (see Fig. 1) and will continue to rise (see Fig. 2), RoEs achieved by Tier 1 investment banks prior to the new wave of regulations could decline on average by 5%
  • 3. 3 Figure 1: % of group-wide net income spent on compliance risk management Figure 2: Predicted % change in compliance programme investment over next two years against a backdrop of lower revenues and profitability across core businesses. Senior industry figures report that as much as 70% of their variable investment budget in 2014, and again in 2015, has been set aside for regulatory reform. The stringent nature of regulatory deadlines is clearly a significant driver of this approach, and something over which banks have little or no control. That said, there are also a number of internal challenges at work: • Governance A decentralised governance structure leads to distributed decision-making, which is frequently misaligned with budget allocation – the result is a short-termist outlook which is subject to individual agendas, and which may be exacerbated by the siloed cultures of different business divisions. • Legacy systems Tactical solutions to urgent regulatory demands are often built on the back of legacy systems, which are not fit for purpose and which may require costly maintenance to keep running. • Headcount When faced with regulatory challenges, an automatic reaction for banks is to hire heavily within compliance – 82% of respondents in the Accenture Compliance Risk Survey (2014) were either actively investing in greater headcount or planning to invest further. Without wider changes to the operating model or decision-making process, simply throwing resources at a regulatory problem can result in solutions that are unnecessarily complex, inefficient and inflexible. • Relationship with regulators This has improved in recent years in the face of the significant reputational and financial risks posed by regulatory breaches. However, after years of focusing <1% 1 - 2.9% 3 - 4.9% >5% 70 60 50 40 30 20 10 0 • Overall • Europe • North America Source: Accenture Compliance Risk Survey, 2014 • Increase < 10% • Increase 10 - 19.9% • Increase > 20% • No change Source: Accenture Compliance Risk Survey, 2014
  • 4. 4 Any operational and technology change should be run in tandem with business model reviews. Figure 3: Industry examples of process improvement Operational Risk Control Know-Your-Client T+2 Settlement Cycles Build better processes, not control measures Target the definition and implementation of better processes that are inherently less risky, rather than focus on adding controls to close gaps and reduce the risk in existing processes Process Improvement Benefits Less complex processes with reduced risk • Reduced operational risk • Reduced complexity: lowers cost and makes processes more flexible for future change Business opportunity to monetise data Large amount of information gathered on clients could potentially be monetised in a number of ways: • Client insight, cross-selling opportunities • Industry-wide KYC utility Develop a co-ordinated global team Deploy co-ordinated regional centres of excellence with common processing and infrastructure that can handle large volumes Enhance straight-through, exception-based processing Focus on reducing touch points in the settlement process through the use of better technology, rather than expanding Operations teams Scalable solution that supports industry best practice • Compliance with CSDR regulations • Reduced settlement liquidity risk for clients is a competitive differentiator Source: Accenture Research on revenue-generation at all costs, investment banks are still playing catch-up when it comes to balancing the competing needs of clients, shareholders and regulators. A consequence of this approach is that banks have addressed the complexity of regulation with similarly complex solutions. The response to Basel II is an instructive example: having assembled, at great expense, large infrastructures to calculate capital requirements, many banks have found that they are unable to make appropriate business or accounting decisions with systems which sit outside of the day-to-day running of the bank – this becomes a particular problem during stress-testing exercises. Building for the longer term As the Basel II example demonstrates, regulatory change programmes must take a firm-wide, business-focused view. Any operational and technology change should be run in tandem with business model reviews to enable a more structured, effective and cohesive outcome that helps to avoid complexity.
  • 5. 5 Investment banks dealing with the current high volume of regulatory reform must turn their current challenges into opportunities to drive strategic change. When defining a regulatory strategy it is also important to acknowledge that, to be most effective, change must come from the top and filter down through the organisation. Banks must address the problems caused by a decentralised structure by simplifying and strengthening governance frameworks. They must also drive a more unified banking culture across their lines of business, a strategy which would confer associated benefits for conduct and reputational risk. Banks must also ensure they hire the right people for the job. Although timelines for the implementation of new requirements are strict and aggressive, properly addressing the 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 truly business-focused change capability. Re-focusing on process improvement to drive regulatory compliance Regulation has proven to be a powerful driver of change in recent years, and is likely to remain so for years to come. As a result, a common challenge is that regulatory change programmes invariably jump to the top of the prioritisation queue, often ahead of projects to grow or enhance the existing business. We encourage banks to see this as an opportunity rather than a challenge: with the right strategy in place, regulatory change can be the catalyst for tangible business benefits. To do this successfully, banks must recognise the symbiotic relationship between process efficiency and compliance, and build into the foundations of every change programme a clear view not only of the regulatory imperative, but where it aligns with a client or business improvement goal. This is not an immediately obvious relationship, but we believe there is a clear link between achieving successful regulatory change and driving process improvements. We include a number of examples in Figure 3. These examples illustrate how banks can exploit regulation to achieve business success, and turn the inevitable focus on regulatory compliance – in terms of budget and management attention – to their advantage. Furthermore, they illustrate how process improvement is an essential component of any solution, helping banks to achieve long-term compliance and true business benefit. Investment banks 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-termist, fragmented approach to implementing regulatory change programmes, and building a clear strategy which uses process improvement as a means to achieve compliance, banks can begin to reduce the complexity, and cost, of their response.
  • 6. About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 305,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com. Accenture Experts To discuss any of the ideas presented in this paper please contact: Chris Thompson Managing Director Capital Markets, New York chris.e.thompson@accenture.com +1 917 452 8982 Tomasz Walkowicz Capital Markets Research, London tomasz.m.walkowicz@accenture.com +44 207 844 5542 Disclaimer This report has been prepared by and is distributed by Accenture. This document is for information purposes. No part of this document may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice. Copyright © 2014 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.