For financial services, compliance is as inevitable as death and taxes. But with compliance costs spiraling amid intensifying competition, banks are finding themselves increasingly squeezed.

Back in 2018, a survey of US banks by the Risk Management Association found that half of respondents were spending between 6­‑10% of revenues on compliance. And both banks and their customers are paying the price: According to the survey, these higher compliance costs resulted in less flexibility in designing products and higher product costs.

This situation has only intensified since then. Post-2018, the third phase of the EU's Securities Financing Transactions Regulation (SFTR) went live, the second Payment Services Directive (PSD2) was effected and the Sustainable Finance Disclosure Regulation (SFDR) is being phased in. Meanwhile, LIBOR is being phased out.

The regulatory trend is clear. The only question then becomes—how can banks effectively and efficiently navigate the shifting compliance landscape? These four best practices can help banks enhance the efficiency and effectiveness of their next compliance project.

1. Prioritize the customer experience

The banking industry often talks about customer experience in a front-end, customer-facing context. They discuss user journeys, nurturing relationships and delivering on expectations. But what about back-end activities such as compliance?

Take SFTR reporting requirements as an example. To ensure success, banks must elicit responses from numerous counterparties. But are they making it easy for them to answer those queries? And are they taking into account the number of times these counterparties are being asked for the exact same information by dozens of banks? For many customers, the experience is exhausting and overwhelming, a situation that some banks are choosing to address by establishing consortiums to standardize and streamline these requests.

Context is another consideration at a time when back-office communications are not designed to deliver the contextual and personalized experience that the front office has perfected. For example, financial services counterparties and corporate counterparties often need to be handled differently. To boost response rates, you may need to provide more context to the latter on why it is important they respond to your queries. That is customer education—another crucial part of the customer experience.

2. Explore collaborative models

Competition in financial services is getting increasingly heated as technology allows new entrants to stream in from previously unrelated sectors. But competition does not preclude collaboration—especially when it comes to compliance, which affects every participant. After all, adherence to regulations is not a competitive advantage, which means that there is no downside to sharing this information with peers.

Instead, the industry may well benefit from a more collaborative model that enables all participants to collectively achieve better and more efficient compliance outcomes.

Standardizing the approach and utilizing a centralized environment for accessing and providing all the relevant documents creates significant economies of scale, enabling these banks to minimize costs while boosting response rates and improving client relations.

This is unfamiliar territory for many, but the early outcomes suggest strongly that the benefits are worth exploring. As a first step, banks need to take a more proactive stance—engaging with their peers through industry networks and forums, for example. They also need to look for ways to standardize compliance requirements: the greater the standardization, the more effective the collaboration.

3. Challenge legacy thinking

For many banks, the way forward is often constrained by the past. In other words, problems are solved in a certain way because "it's how it's always been done" rather than as a result of a cost and risk analysis.

Proper due diligence can help challenge assumptions and reveal a better way forward. Factors such as a project's strategic need, necessary scale and required technology should be deeply studied before embarking on it. This is especially true when the project involves issues of scale. Obtaining 100 different counterparty responses is a very different proposition than obtaining 10,000, even if the nature of the responses is similar.

Begin with the primary consideration—whether to handle the project internally or outsource it. A few questions to ask:

• How much capacity do my internal teams have?
• Would taking on this additional project divert these teams from other, higher-priority work?
• How can I measure success and progress for this project?
• What would be the costs to hit those success metrics?
• How would these internal costs compare to outsourcing?

The answers to these questions will vary depending on not only the project objectives and availability of internal resources but also the nature of the project. For example, a long-term project with stable workflows is very different from a shorter-term one with fluctuating workflows.

4. Evaluate service partners carefully

For banks that decide to rely on outsourcing to undertake a compliance project, the choice of partner requires careful consideration. Beyond reputation, references and a proven track record, banks should look at these key areas for clues to the true capabilities of the outsourced compliance service provider.

• Education models: How much training would you have to provide the outsourcing partner for them to be able be fully onboard and ready to go? What types of training are staff required to undertake, and with what frequency is that training refreshed?
• Staff retention: How good is the service provider at retaining their own staff? High turnover can force banks to deal with constantly changing personnel over the project's duration, which might impact communications and productivity.
• Business model: What resources does the provider rely on to deliver the service? Are they an intermediary that subcontracts to other companies, or do they handle everything in-house? Subcontracting relationships can result in a lack of accountability and service degradation.
• Value-adds: What additional capabilities does the service provider offer? Look closely at the technologies that support service delivery, especially those that enable counterparty communication at scale. Intuitive project tracking tools are another example.
• Industry leadership: Is the service provider taking an active industry role? How do they stay plugged in to regulatory developments and operational realities in banking? How have they demonstrated innovation and leadership in these areas?

Keeping pace as regulatory change accelerates

There is a regulatory race going on. However, it is not being run between individual banks but between the banks and the regulators. The longer banks wait to act, the farther behind they will fall—and the harder (and more expensive) it will be to catch up. By rethinking key considerations such as the customer experience and service delivery models, the banking industry can find new ways to keep pace.

Posted 22 June 2021 by Marjorie Chee, Global Head of Managed Services, Regulatory Compliance, S&P Global Market Intelligence

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.