High compliance risks in financial services demand smarter data strategies

By Adam Quirke, Business Development Lead – Financial Services, InterSystems UK & Ireland

Financial services firms know any failure to comply with the complex web of global regulations is likely to be expensive in fines, reputational damage, and ultimately – loss of business.

As regulation becomes ever more complicated and demanding, however, many companies in the financial sector face one significant difficulty: their data lacks sufficient quality to be effective for reporting and risk modelling. Firms have limited capabilities when it comes to accessing, preparing and fully exploiting their data, which demands a new approach to data management.

Investing resources into projects and processes which focus on unifying all available data is one of the most significant steps financial services firms can take in compliance and risk management, automating some of their processes and increasing data quality.

Data difficulties undermine compliance with new rules and regulations

Problems with data in risk management are widespread. An InterSystems survey of financial services professionals in the UK and Ireland found 48% viewed improving risk management as their top compliance priority. The barriers are significant in a year when regulators in the EU and US are about to lower their tolerance for poor risk controls or inadequate governance, introducing a tidal wave of risk-related new requirements along with updates to existing regulations.

Firms must continue to comply with AML rules and ESG disclosures, adjustments to UK prudential banking regulations, Basel IV and bolstered consumer protection, such as Consumer Duty, APP fraud reimbursement, and US Consumer Financial Protection Bureau rules.

In ESG regulation, European Supervisory Authorities are on the lookout for greenwashing of investment products, seeking to reduce risk for market players, investors, and consumers. By the end of 2024, the European regulators want banks to update their strategies on climate and environmental risk, with the threat of fines for non-compliance.

In the UK, the FCA and PRA (Prudential Regulation Authority) have taken a strong line on greenwashing risk, introducing disclosure rules and are examining AI in financial services. The PRA is considering regulatory guidance around data management, risk modelling and resilience in AI.

In the US, regulators are also interested in AI risk. The US SEC (Securities and Exchange Commission) has, for example, been examining systemic risks arising from the deployment of predictive analytics by broker-dealers and investment advisers, proposing new rules to iron out conflicts of interest.

The collapse of Silicon Valley Bank and others in 2023 has also prompted regulators in the EU, UK, and US to focus even more closely on risk in relation to capital requirements and crisis management. The PRA in the UK is looking at Basel IV banking standards through the lens of various types of risk in the markets, credit valuation adjustment, counterparty credit and operations. The Federal Reserve in the US has responded by proposing increased capital requirements for large US banks.

This list of new regulations focusing on risk extends to the EU Digital Operational Resilience Act (DORA) which is set to come into force from January 2025 and applies to more than 22,000 EU financial entities and related IT providers inside and outside the bloc. Third-party risk management is a key feature.

The data shows financial firms spend too much time on compliance

The problem in the financial world is that despite digital transformation plans, manual processes remain common in compliance functions. This compounds the difficulties that result from having to access data in different places.

In the InterSystems research, 52% of respondents said they spend ten hours or more manually tackling compliance tasks in an average week. More than a third (38%) have significant difficulties with risk modelling and analytics. A third (33%) said one of the most challenging aspects of compliance is simply the sheer number of data sources required to fulfil reporting requirements.

Where the smart data fabric hits the sweet spot

To overcome these difficulties, firms need to modernise their data architectures quickly, which is what a smart data fabric architecture can achieve. An architectural approach to data management, the smart data fabric delivers the powerful capability to unify data and automate data processing, making it ready for analysis in real time. Implementation is swift because this is an approach that requires no replacement of existing systems. All it demands is a commitment to improve data quality.

The smart data fabric is effective because the essential truth about effective risk management is that it is founded on access to accurate and timely data. Compliance departments and risk managers can access these data without recourse to the services of data scientists, who are in any case very hard to find and expensive to employ. Everyone with a responsibility for compliance, including CFOs and boards should have a comprehensive view of risk across all their operations, assets, and liabilities.

The problem is the volume and variety of data required for compliance and risk management is constantly expanding, which overwhelms manual methods or legacy applications. A smart data fabric architecture, by contrast, draws together, cleans up and harmonises data from all required sources. Without actually moving and duplicating the data, it enables financial services firms to get real time access to the information and analytical insights they need for risk management and reporting purposes.

The emergence of the smart data fabric is a highly significant development for risk managers and compliance functions. It removes almost all the difficulties they face when using traditional manual methods or legacy applications that are no longer fit for purpose. Instead of complex extraction and verification processes, the smart data fabric provides the precise information teams need at the time they need it.

The financial services, asset-management and banking sectors in the UK, US and Europe are all moving through a period of intense regulatory activism. The smart data fabric is the approach they need to transform compliance and risk management, avoiding the potential for significant penalties, while enhancing efficiency and competitiveness.

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