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Driving business innovation from regulatory pressures

Monday 23 January 2012 – by Claire Paisley and David FitzGerald

Innovation and regulation are words that are not often strongly correlated in any sector – let alone the financial services industry – but this can change, according to Claire Paisley and David FitzGerald of Baringa Partners.

This article outlines the key opportunities that financial institutions are presented with by bringing regulatory and innovation agendas closer together across risk management, product development and organisation-wide operating structure.

The pace of regulatory pressure

There is no doubt that the regulatory burden on financial services firms is fatiguing and it is not surprising that most struggle to keep pace in the race to compliance.

The past few months have seen CRD III implemented, and soon we will see components of Basel III/CRD IV come into effect alongside Mifid II, Solvency II, and Dodd Frank for US firms.

Firms in the UK must also prepare for potential increases to tier one capital ratios as well as the widely-debated FSA consultation paper on banking reform and retail ‘ring-fencing’, proposed by the Vickers report.

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Across this spectrum the price of compliance is staggering. Indeed, JP Morgan expects that across the 16 largest global banks between $110bn (€84.6bn) and $221bn (€170bn) of additional capital will need to be raised in 2011 and 2012 to meet the new requirements.

On top of this there is the considerable cost of implementing processes and procedures in order to satisfy the plethora of regulatory requirements.
However, the impact of this regulatory pressure is felt not only in monetary terms.

The limitations of compliance

It goes without saying that the most inefficient way to comply with new regulations is to layer new technology and processes on top of existing systems.

Yet this is exactly how most financial services firms choose to operate. Complexity is added – rarely, if ever, is it removed.

The increasingly apparent challenge is the need to drive more fundamental and wide-spread change; not only to reduce this spaghetti of systems and processes, but also to drive more innovative ways of responding to regulation.

Put another way, well-managed regulation responses, could actually begin to promote, rather than suppress, a company’s ability to differentiate themselves and compete.

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