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Assessing risk to reduce the burden of regulation PDF Print E-mail
Wednesday, 28 October 2015
The pressures of regulatory change across the industry post-recession, such as MiFID, Dodd Frank, and BCBS 239 to name a few, have been monumental. This has resulted in stretching compliance, IT and other support functions to the breaking point, as they all scramble to meet with the demanding deadlines.  And the message from the regulators is clear, firms need to show good progress towards meeting the deadlines, and should have at a minimum tactical processes in place to meet the requirements backed up by robust planning for strategic solutions.

But while many institutions are focusing on the regulatory burden, the truth is that, in general, organisations simply do not know their current risk state. As such, there is insufficient insight into the implications of that state on the existing IT infrastructure or the potential costs associated with addressing risk and achieving the required remediation of systems.

However, the issue goes beyond regulatory specific compliance. Today, financial institutions do not have adequate controls in place to prevent systemic failure in process or governance, failures which could lead not only to massive fines but also reputational risk, financial risk, even complete business failure. Moreover, they have little, if any, understanding of any legacy operational, technical, or cybersecurity risks to which they might be exposed.

Unfortunately, the typical response to date has been to rely on the out-dated methodologies of traditional third party consultants, on a regulation by regulation basis. This approach is only adding cost and risk, and only addresses part of the process – interpreting the regulations and producing a ‘target compliant state’ for each regulation.

With the patchy, regulation by regulation model not sustainable, a new attitude and approach is required – and one that embraces end to end thinking. The only way financial institutions are going to attain a true risk position is to take control by using true industry experts to build a comprehensive risk profile – of both new and existing risks - through detailed assessment.

Using a proven methodology and process that utilises an independent set of control questions to be answered and evidenced by the three key stakeholder groups for any business line – namely the business, IT developers and support – an organisation can undertake a self-assessment process for each regulation. This process can transform the cost/time associated with regulatory assessment – with organisations able to achieve a complete, cross-organisational review within months, at a fraction of the cost of the traditional third party consultancy model.

Essentially, if organisations are able to proactively approach the regulator with a clear, proven risk state and roadmap for achieving compliance they will not only demonstrate a complete, 100% awareness of the state of compliance but also demonstrate to the broader political landscape that financial institutions are committed to reducing risk and cooperating with regulators, a fact that could go some way to healing the huge trust gap that continues to hamper effective financial operation.

Frank Pottle, Associate Director, Hatstand
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