Banking Regulation: Connectivity to Compliance

(Southampton, 12 July 2016)
Mark Bands, Head of Product & Regulatory Intelligence, iMeta Technologies, discusses the operational issues many financial institutions face when trying to remain compliant with the many regulations that govern their global activities in his latest piece in Financial IT magazine.

Click here to view the article in the magazine on page 40 https://financialit.net/sites/default/files/financialit_june_issue_2016.pdf

It is now a reality that entity data acquisition and its management is central to the efficient operation of capital markets and is fundamental for financial institutions’ risk management, customer service and regulatory compliance. The increase in volume and complexity of the data and the advent of solutions such as Customer Lifecycle Management platforms, managed services and entity data utilities,
has now created a large and multifaceted ecosystem of challenges and capabilities that need to be assessed, contextualised, understood and addressed. Firms that wish to put in place capabilities to overcome the challenges they face, need to undertake both significant current state analysis and
strategic planning based on an informed assessment of a future, international, and operating context.

Operational Issues identified:

In our experience, the operational issues in the client lifecycle and entity data management space usually encompass: a combination of manual processes / no automated workflow, ad hoc application of
policy, no audit trail of either data or policy implementation, inaccurate or missing data, lack of system integrations (no STP), and poor engagement and understanding between critical teams across business lines and geographies.

To make things more piquant, interwoven with these already challenging situations are the actual data management tasks of:

• Obtaining and maintaining entity identifiers (LEI, SWIFT BIC etc.)
• Knowing and interpreting global regulations that require entity data
• Sourcing core entity and corporate hierarchy data
• Managing disparate approaches to entity data management within the firm
• Dealing with entity data quality issues
• Articulating the benefits and business opportunities of strategic entity data management

A subset of these issues, yet a large proportion of the difficulties, lies in the variety of regulations themselves and these need an exposition all of their own.

Regulations:

As noted above, a focal point of entity data management is the need for banks to remain compliant with the many regulations that now govern their global activities. Across geographies, different
regulatory approaches have been taken to address similar market issues; resulting in areas of both inconsistency and significant overlap in their demands. This situation has increased the challenges for firms who operate cross-borders, and as complex as the landscape already is, the market view is that the regulatory scenery will continue to evolve; most likely increasing differences for the foreseeable future.

It is key for firms to work now, to be in a position to respond flexibly as the situation develops. A quick look at some of these regulations gives us a headline list:

• OTC Derivatives – Dodd Frank Act (USA) and the European Market Infrastructure Regulation.
• Tax – Foreign Asset Tax Compliance Act (USA) and the global Common Reporting Standard.
• Anti-Money Laundering – The European Anti-Money Laundering Directive IV and the Financial Crimes Enforcement Network Customer Due Diligence in the USA.
• Data Quality and Privacy – The Basel Committee on Banking Supervision 239 and European Union General Data Protection Regulation.
• Market Oversight and Abuse – Markets in Financial Instruments Directive II and Market Abuse Directive / Market Abuse Regulation.
• Management Responsibility – Senior Managers’ Regime (UK).
• Insurance and Asset Management – Solvency II, UCITS and AIFMD.

Solutions:

Clearly in an age where it is imperative that firms have access to trusted data for use in their Know Your Customer (KYC) and Anti Money Laundering (AML) and many other regulatory compliance processes,
the ability to use data integrated directly into your workflows allows firms to:

• Create speedy and accurate compliance decisions
• Automate data collection processes
• Reduce the number of resources required to execute compliance processes
• Provide support for the management of risk
• Build customer satisfaction and avoid losing potential business

With these numerous benefits, connectivity and integration are completely central to the successful use of internally or externally sourced data. Conversely, without integration capabilities, any firm that has access to even the very best data content will never fully realise its practical utility; unless in the first instance it is able to connect to the data (get it), and secondly, integrate that same data (distribute it) into the business processes of the firm.

Industry leaders have defined integration as, “discovery, cleansing, monitoring, transforming and delivery of data from a variety of sources.” Utilising connectivity through application programming
interfaces (APIs) and internal integration capability, Onboarding and Client Lifecycle Management (CLM) platforms provide the solution; exchanging data with locations both inside and outside organisations.
Data can now be collected from a growing number of external sources and turned into relevant information that firms would find difficult to create, or would have had to obtain and manufacture manually. Such platforms assist with the ability to integrate and use publicly available data collected and managed by others to further enhance an organisation’s KYC / AML knowledge and required operational data sets.

In our experience we have noted that many business processes also require an assemblage of data from different sources; either internal, external or a combination of both. This means that after initial
acquisition, the need for data aggregation capability comes into play as well. Combining information from various sources into something useful is the primary purpose of an aggregation capability. As both a technical competence and a business process, this is about efficiently managing data and making it available to those who need it, in a form that they need it in. Tools that automatically produce composite records comprised of the most recent and most favoured data chosen from all contracted
data sources are therefore foundational.

Additionally, per the concept of a Satnav that shows you how to transit the road system from where you are to where you need to be, data mapping for integration is also often necessary. In an integration
context, mapping is the process of defining the source and destination of data, in addition to the transformations that need to be performed on the data, as it is moved between source and destination.

Avoiding a situation of “data, data everywhere, nor any value gained”, data connectivity and integration are indispensable, behind-the-scenes enablers, which assist both critical and valuable business
activities in organisations. For maximum value, we have also learned that data needs to be transformed and re-purposed, not just moved from A to B. In nearly every business dimension it is now imperative
that we cater for a working world where aggregated, synchronised, current and quality-assured compliance and operational data is delivered daily.

Conclusion:

Because financial services firms don’t want to re-engineer their business processes to comply with the constraints of a software solution, the required CLM platform is by explicit design a flexible
modular platform; where end user firms are able to invest in the elements of the platform that solve their specific business and compliance needs. It follows then that the vendors of such a platform also have considerable data management, integration and implementation experience. This experience enables the vendor to work with clients; to review data and regulatory policies, define strategies, and develop solutions, ensuring connectivity to compliance in the current regulatory environment.