How financial operations departments can manage the juggernaut of regulatory change

Taskize CEO, Perspectives, Regulation

Financial regulation continues to grow, building enormous pressure in operations departments. Nevertheless, by investing in technology and infrastructure, financial services firms are finding ways to cope. We examine the Taskize solution through the lens of a penalty dispute.

Although it’s now 12 years since the Great Financial Crisis, the rate of regulatory change remains relentless. According to the Bank of England, the Basel Committee on Banking Supervision published twice as many regulatory standards between 2009-17 than in the prior two decades.

The pace-setters of regulatory change

Politics is a key factor in driving the pace of regulatory change, with growing nationalism spurring the divergence of regulatory regimes.  Brexit is a case in point.

Another driver is financial innovation, with regulators scrambling to keep up with new business models and practices, particularly those resulting from technological change.  Capital is flooding into digital banking, and novel digital assets, and more activity moving online.

To illustrate the scale of change from personal to digital banking, the Bank of England published a report in 2019 which observed that “today the world’s largest financial services firm is China’s Ant Financial with over one billion clients — without any branches. A decade ago, it was Citigroup with 200 million customers.”[1] These changes are leading regulators to look more closely at cybercrime and data security, and the structure of the markets themselves.

A third driver is that financial regulations are seen by the financial industry itself as effective at combatting crime and risk.

How regulatory change creates risks as well as solves them

For financial services firms, continuous regulatory changes like the ones listed above create intense pressure and increase the risk on day-to-day operational activities.

Although operational teams are undeniably resilient and adaptable, the continuous stream of new rules creates new obligations, increasing the risk of process fails, compliance breaches, and reputational damage.

This is driving firms to outsource more of their operational activities. Our latest research “Both Hands Firmly on the Wheel – How buy-side firms gain and maintain control in a business process outsourcing world”  shows two important reasons for outsourcing: to access the latest technology and create operational capacity, largely in the face of regulatory demands.

But as we set out in a recent article, outsourcing inter-company workflows requires precise control over the outsource services providers (OSP). Failure to maintain control over outsourced operations can be a significant risk for outsourcing firms, as proved to be the case in May 2019 for a UK bank which was fined by both the Financial Conduct Authority and by the Prudential Regulatory Authority because its OSP’s disaster recovery processes were inadequate.

Where outsourcing is not an option, increasing the level of internal automation is an obvious way of relieving the pressure on operational teams.  However, continuously changing regulations make automation costly, particularly for those firms reliant on complex legacy systems.

If systems cannot be automated to address regulatory requirements, the only answer is to increase the size of operational teams to meet the requirements manually.  The Financial Conduct Authority has recognised the risk this poses to day-to-day operations as senior operational experts are diverted to manage the changing regulatory requirements. As the burden on operational departments increases, so does the risk of human error in highly pressured situations.

And finally, the tools that operations departments use to manage their work may be responsible for yet more risk. The universal example is email. On average, 17 emails are required to resolve an issue but, due to prevalence of distribution lists, 100s of additional emails are created, creating unnecessary noise for other team members.

In our research cited above, we interviewed more than 100 senior buy-side executives. All of them used email as at least part of their workflow management communications, yet they all acknowledged that email was not fit for the purpose of resolving operational issues securely and efficiently.

In other words, there is an urgent need for better solutions to offset the risks of more regulation and outsourcing, growing operational teams and increasing email flows. This is where Taskize can help.

Use case: Penalty Dispute resolution under the Settlement Discipline Regime of the Central Securities Depository Regulation

The settlement discipline regime, which will become effective in February 2022 as part of the Central Securities Depository Regulation (CSDR), will include new penalty processing obligations. Daily penalties received from a CSD may be disputed by the failing party whilst it continues to resolve the failed transaction to avoid a buy-in.

Taskize’s new penalty dispute resolution service sits alongside its existing fails resolution capability to streamline the collaboration between seller and buyer as follows:

  1. The seller opens a Taskize Bubble, a secure virtual workplace where all parties can collaborate and share information related to the dispute. Once all the parties have been invited into the Bubble, the need for email disappears. If a party cannot join the Bubble, they can stay using email and all information, including any emails, can be shared, prioritised and actions assigned within the confines of the Bubble.
  2. Another tool, the Taskize Smart Directory, helps navigate through the teams at counterparty firms to find the right person to resolve the issue. Using Smart Directory, the seller identifies the relevant parties at the buyer, custodian and CSD, and invites them into the Bubble.
  3. Resolution details can be sent back to the original back-office system so that corrections can be made and passed to the CSD for settlement.

Managing the regulatory juggernaut

It is inevitable that firms will experience more and more pressure as regulations increase. Without proper tools, the size of operations teams will multiply, the number of emails will continue to rise, and costs will spiral.

However, with the right solutions, firms can manage.

In the example above, firms using the Taskize solution can outsource settlement issues to a custodian or agent, knowing they could resolve any problems within a secure bubble and with full traceability. This is because all activity within a Bubble is restricted to only those invited in. Confidentiality is assured, and your clients need not be aware that any processes have been outsourced – which is critical to preserving brand and relationships.

With Smart Directory, they are able to find the right person at the right time – even if your outsourcer – which is essential when the risks are high and time is critical.

Finally, they could overcome the inadequacies of email-based operational communications by using the Taskize email management solution to ensure that actions are assigned and prioritised and that the risk of overlooked emails sitting in bursting inboxes is eliminated.

If you would like to find out more about how Taskize can help you manage your operational workflows, click here to arrange a demo.