Regulation: why it must be seen as the carrot rather than the stick

Greg King is SVP Europe, workstation solutions at FactSet

The global financial crisis triggered an avalanche of fierce criticism for the financial industry, the repercussions of which are still being felt. In its wake industry bodies around the world introduced stringent regulations that require in-depth auditing to achieve compliance and complete corporate accountability, writes Greg King

It’s 2015 now and the world is a different place. Trust in our financial institutions remains low and since coming into force in April 2013, the Financial Conduct Authority has handed out nearly £2bn in fines to those failing to comply with the new rules that have been put in place to help prevent history repeating itself.  On the buy-side, these breaches include (but are not limited to), non-compliance with investment limits, failure to protect clients’ money, exposure to excessive risk and an inability to justify research processes.

Given this stringent regulatory environment, many financial services firms are looking for ways to effectively meet the need for in-depth audit trails. Furthermore, there are increasingly positive signs that many are using the opportunities presented by the use of data management systems to not only achieve compliance, but also to develop a competitive advantage. The stick used to beat the industry in its darkest hours is increasingly looking like a tasty carrot to those savvy enough to see it.

Of course even before the financial crisis, some financial services providers had already started investing in solutions to improve the organisation and accessibility of their internal information. But an inevitable period of cost-cutting as the economy contracted, forced many companies to scale back their investment or postpone the data management projects that were in the pipeline.

Now that budgets are again on the increase, investment firms are revisiting the idea of integrating wide-scale research management solutions into their organisations. Their goal is to streamline the research process, improve the sharing of data and help them meet new financial regulations aimed at forcing the buy-side to become more transparent.

Traditional data storage and filing solutions create a wide range of problems. Finding all of the relevant information in a timely manner can be a vast task in itself, but even when the relevant information has been gathered, can its content and integrity be verified? Often the answer is no, as files saved on individual terminals and servers not linked to the central network cannot easily be linked to related data, subsequent events, current analysis and the record of the author’s other investment choices and analysis. That ‘big data’ problem we’ve all been told we have for the last few years, suddenly doesn’t seem like it’s just something other people are facing.

There are obviously many reasons why you need to have a complete audit trail. As well as using it to hunt down new business opportunities, managers may also need to fully justify decisions to their existing clients. It can happen that due to lack of timely and full information, a less than optimum investment choice is made. It’s therefore important for an investment firm to be able to rationalise why this selection has been made and prove the choice was based on the best information available at the time. This can be a painful process of course; having investment-critical data spread out and completely unstructured makes tracking the reasoning behind a decision extremely difficult and sometimes impossible.

Dispersed data doesn’t only create problems with audit trails. As institutions look closely at their teams’ processes, some find inconsistent methods and individuals working in siloes. Isolated information in separate locations means vital data on investment-critical decisions is completely inaccessible to portfolio managers in other teams. Not only is data then not widely available, but when team members leave the company the information departs with them. In the world of international business, such an approach is outdated and does not allow a company to take full advantage of its scale and the wealth of expertise available within the organisation.

That though, is the old world. From little more than a fifth of firms having an RMS solution in place in 2008, more than two thirds now have them integrated into IT systems, according to research from Cutter Associates. Analysts and portfolio managers are now using RMS systems that integrate these recommendations into other buy-side facilities such as market data, target, prices and newswire data to make more widely informed judgements at speed for portfolio holdings or investable universes.

When good practice is prevalent across the organisation, critical insights are available to all relevant investment professionals. With internal research and other relevant data easily accessible, analysts no longer have to duplicate work already done by other members of staff analysing an asset and its recent performance. Portfolio managers can make faster investment decisions and sell quickly when the target price has been reached. Policy managers can call a meeting and within minutes, have the complete range of analysis tools in front of them to apply policy if needed.

The rogue financier is no longer an option for companies – investors now demand reliability and robust accountability from their professionals to protect the company’s reputation. Technology can provide this assurance, and can also bring exciting new processes into finance that increase the quality of information available,  providing companies with a competitive differentiator. Regulation and compliance don’t need to be dirty words, because actually, they might just be one of the most important catalysts for growth that’s been missing all along.