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Mon 20 Jul 2009 03:48 PM

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Compliance: A business opportunity

Using compliance as an opportunity to get ahead of the competition, by Suhas Nayak product director Risk Management, Fernbach.

Compliance: A business opportunity
More efficient risk management strategy can result in lower capital requirements and higher income prospects for banks, says Nayak.

Using compliance as an opportunity to get ahead of the competition, by Suhas Nayak product director Risk Management, Fernbach.

Confronted by regulatory requirements such as the Sarbanes-Oxley Act, Basel II or the international accounting standards (IFRS), many financial institutions see themselves forced to implement new in-house data processing measures and to constantly check and adapt their systems and procedures.

These regulations are just some of the well-known examples which exercise a considerable influence on banking business. Violation of such rules can incur heavy penalties, while inefficiency can weaken a bank's market position.

Nowadays, no-one seriously doubts that there is a need to anchor regulations in IT infrastructures. New rules have to be integrated more and more quickly into key processes and business procedures, resulting in technical challenges, such as the introduction of adequate compliance solutions or information technologies, which is a prerequisite for complying with all standards. The ability to adapt quickly to changes in regulatory requirements or to implement these can result in a strategic advantage for banks in an intensely competitive environment.

Interim solutions for IFRS compliance are reaching their limits

Many decision makers consider such compliance projects to be an additional, interminable drain on their IT resources and budgets and not as a way of improving their operating capacity. In order to gain time, numerous banks have put their compliance application into operation as an interim solution.

However, although these tactical approaches would seem to produce manageable implementation and support procedures, they result, in particular, in an increase in manual and administrative input in the respective business units in a bank, because legal requirements cannot be mapped or are mapped incompletely. As a consequence, there is growing criticism of this type of ‘compliance solution' among auditors and national supervisory authorities who even partially reject them for long-term use.

Taking shortcuts in implementation procedure will not result in a sustainable IT compliance solution. Practical experience has shown that these interim solutions are not conducive to forming a long-term, stable basis for a legally compliant accounting system or adequate risk management in banks. They must be replaced by systems that are able to map both current and future IFRSs and therefore comply with regulations.

Experts estimate that one third of the IT costs in the banking industry are incurred by these regulatory requirements. Many financial institutions spend a large part of their IT budget on replacing outdated applications with modern systems. Existing IT architecture is characterised by a considerable degree of complexity and heterogeneity which is mainly caused by a lack of flexibility in the applications and by the difficulties experienced in upgrading these to meet new standards.

Depending on the size of an institution, it is possible to find IT landscapes and infrastructure comprising several hundred systems which have even more interfaces between these systems. Obviously, such a situation offers enormous optimisation and saving potentials. The standard for judging a compliance solution must be, in particular, its ability to ensure sustainability, compliance, security, stability and an adequate degree of automation.

Many banks are meanwhile aware that there is pressure to take action and to replace provisional compliance solutions with a solid, extensible basis that is sustainable in the long term.

Turn comprehensive compliance requirements into opportunities

Compliance regulations should not be seen as a burden but rather as an opportunity because not only do they compel financial institutions to structure their systems and procedures efficiently in order to operate within legal provisions, but they enable the implementation of an integrated infrastructure, instead of tactical solutions, thus providing a valuable, overall view of all corporate divisions.

Banks, which take on these challenges and pursue a strategic approach involving a comprehensive, extensible compliance solution, will discover that they have set up an adaptable, efficient and reliable infrastructure which will allow them to react to and implement new international, national and regional standards.

At the same time, they can use compliance investments to optimise their business processes, ensure process transparency and improve internal controlling mechanisms as well as business flexibility.

An improved business management strategy can result in a release of IT resources and corporate divisional personnel which can then be engaged more efficiently to increase productivity. Hence, financial institutions can adhere to the more stringent legal requirements while implementing proactive strategies to ensure competitive advantages.

What benefits can be gained from a comprehensive, strategic compliance solution?

Complying with legal provisions can go hand-in-hand with increasing efficiency in and income from key business operations, providing advantages for the banking sector over and above simply complying with regulatory requirements.

In addition, banks can save costs by adopting an all-round IT compliance solution since the time factor and project risks are limited and operational risks are minimal. Therefore a more efficient risk management strategy can result in lower capital requirements and higher income prospects.

Furthermore business procedure operates more smoothly and efficiently which leads to a greater savings potential and considerable competitive advantages.

Other benefits include technical infrastructure streamlining, adjustment and standardisation of the data set as well as the opportunity to manage complex, heterogeneous IT infrastructures and to scale these to accommodate corporate growth. Not least, the implementation of a comprehensive compliance platform will allow banks to boost their corporate image and improve their reputation.

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