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Regulatory change and the prize of effective execution

REGULATORY CHANGE comes in waves, and the current wave feels like it could be the biggest yet.

This is a period where the agenda of chief financial officers is dominated by regulatory change. Banks, and especially the finance function, are facing an avalanche of new requirements with tough deadlines. To those at the coal-face it feels as if a maelstrom of new regulations – sometimes contradictory, often confusing and unclear – have issued forth from a multitude of national and global regulators.

However, the public debate has focussed on the macro-economic, systemic and business impact rather than on how to execute the changes effectively. The macro-economic impact is clearly important, but so is having the ability to deliver them quickly and efficiently. The challenges that financial institutions are facing in achieving this are unique. The lessons that are being learnt can be applied to all sectors in understanding how their change capability can bring about a competitive advantage, both in the finance function and across the organisation.

The high profile nature of reforms impacting the banking sector means that the roll-call of regulatory initiatives in recent years is one that will almost be recognised in the high street and not just the boardroom. Basel III, FATCA (Foreign Account Tax Compliance Act), the European Union Capital Requirements Directive, Recovery and Resolution Planning, compensation regulations, the Dodd Franck Act in the US and its counter-part in the European Union, the European Markets and Infrastructure Directive is a long list.

It will also be quite a painful list to read for those responsible for implementing them. The key features of effective change management have been discussed and work-shopped in business schools and corporate classrooms for years. However, in implementing these regulatory changes, financial institutions have faced a unique set of challenges which would have been difficult to foresee and plan for with the traditional tool-kit.

Firstly, in a number of cases, the requirements have only been finalised by the regulator close to the compliance date. Furthermore, the requirements have often changed relatively significantly over time and it has not been uncommon for compliance dates to move backwards and forwards. As a result, firms have had to fund projects long before the final requirements have been known. Innovative approaches have had to be deployed to justify the funding and minimise the risk of proceeding in advance of known requirements. Secondly, most of the regulatory changes impact many functions of the bank. Implementation problems have highlighted the extent to which functional silos have built up over time which prevent swift and efficient change management.

Collaboration between functions has needed to be significantly deeper than was previously the case. Thirdly, technology platforms and the underlying data have historically developed in an entrepreneurial environment to support short-term business need. Changing these platforms has impacted a huge number of systems and data points: meeting the new requirements has required protracted analysis on a multitude of systems, often not built to deliver the task now asked of them. Fourthly, the drive for change has identified a lack of knowledge around some business processes.

Delivering change when knowledge around existing processes is deficient is a big ask. Finally, successfully bringing a diverse range of people together to deliver change in an industry which has undergone a significance amount of churn from a people perspective is a significant challenge.

The response to these challenges can bring a competitive advantage to firms. Clearly it does not make sense to build a change function and IT platform to suit all current and future external environments. This would be costly and counter-productive.

Furthermore, for smaller, more nimble firms, a tactical rather than strategic approach may make more sense whilst requirements remain in flux. Broadly, the fundamental tenets of effective change management remain as relevant as they always were, such as defining roles and responsibilities, ensuring senior management engagement and focusing on the detail to overcome obstacles to the change. However, in addition to this, there are seven key guidelines firms should follow.

Firstly, there should be an honest debate around change readiness, the strengths and weaknesses of the firm and how to adapt to these. Secondly, streamlined portfolio governance should be put in place to agree priorities and allow swift decision making on resourcing and priorities. Thirdly, a Regulatory Design Authority should be established to define key principles that cascade across all programmes. Fourthly, it is important to maintain open dialogue with regulators around the challenges of implementing regulatory change and ratifying key assumptions with them. Fifthly, quick decisions should be made between strategic and tactical solutions: strategic solutions are admirable but can easily prolong the debate and may not be feasible within the compliance timelines. The sixth guideline is that regulatory changes should be implemented holistically where feasible to leverage cross benefits and minimise implementation costs. Finally, firms should not lose sight of the strategic landscape in the drive to become compliant: new regulations will change business models and performing early business impacts will deliver a competitive advantage.

By learning from the unique challenges mentioned above, firms can create teams which will deliver a competitive advantage by being flexible and adaptive in response to current and future environments. The source of change may vary – it may come from the external market place and competitive landscape instead of from national regulators – but the competitive edge gained by following these guidelines is obvious.

Jeremy Marchant is a senior manager in financial services advisory at EY

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