GDPR preparation has cost FTSE 350 businesses around $1.1 billion

23 May 2018 Consultancy.uk

With the GDPR’s implementation a matter of days away, companies in the UK are still scrambling to comply with the European law. As some confusion remains around key concepts such as ‘consent’ for many top companies, this has seen FTSE 350 spending on the matter speed past the $1 billion mark, according to new research.

The General Data Protection Regulation is a new EU regulation which will govern how organisations manage and structure their customer and employee data after May 2018. Many of the stipulations are already covered in the UK’s Data Protection Act, but after May 2018, organisations will have to prove they have proper data-processing controls in place and that they comply with GDPR.

The GDPR is the most fundamental change in data protection legislation for the past 20 years and is the first attempt to create comprehensive and enforceable laws. The legislation will affect all domestic and international businesses operating in the EU – regardless of size – threatening those who fail to comply with hefty fines of up to €20 million or 4% of global revenues, depending on which one is larger.

Previous studies in anticipation of GDPR suggested the landmark legislation could cost FTSE 100 companies alone as much as £5 billion in fines. Naturally then, this has seen a veritable frenzy of activity among businesses to prepare for the new data law, something which has seen FTSE 350 businesses sink an estimated $1.1 billion into their compliance efforts. According to the International Association of Privacy Professionals and Big Four professional services firm EY, US corporates among the Fortune 500 saw an even higher bill of $7.8 billion.

GDPR preparation has cost FTSE 350 businesses around $1.1 billion

Perhaps unsurprisingly some of the top spenders include internet giants such as Facebook. With Mark Zuckerberg having recently appeared before the US senate following the alleged abuses of user data in the Cambridge Analytica scandal, Facebook has reportedly been scrambling to reposition itself in time for the end of May.

While this spending spree may largely have been entirely necessary due to the practices of companies which motivated the law’s creation, however, researchers also believe the new rules have been left vague, forcing corporates and startups alike to invest in pricey legal experts to interpret how to best prepare for GDPR. Counting a fifth of the FTSE 100 among its clients, magic circle law firm Slaughter and May is one of a number of major law firms hoping to cash in on this, listing the GDPR on its website among its top areas of expertise.

Consent

According to Luther Teng, a Senior Manager in Risk Advisory with EY, this is proving a successful strategy for lawyers, with some of the UK companies he’s working spending up to 40% of their total GDPR compliance budgets – which the IAPP estimates to be around $2.4 million per FTSE 350 firm – on legal advice alone.

Teng elaborated, “Even some FTSE 350 companies that have very established in-house legal teams are having significant costs because they don't have the subject expertise on data privacy, let alone GDPR.”

One of the factors fuelling this was cited by experts as the term ‘consent’. While GDPR explicitly states companies need a clear record of explicit ‘consent’ for any personal data to be collected – for everything from email addresses to a computer’s IP address – for example, there is a lingering confusion among businesses around what exactly constitutes ‘consent’, and whether consent given prior to the GDPR is still valid.

Recently, this continued confusions saw Sia Partners predict that FTSE 100 companies could expect to pay an average of £15 million each to be compliant. This broke down to suggest that companies should be expecting to spend around £300-450 per head on their compliance efforts.

Related: GDPR compliance to cost FTSE100 firms £15 million, banks face largest bill.

×

An 8-step framework for banks to prepare for FRTB changes

02 April 2019 Consultancy.uk

With FRTB expected to come into force in 2022, it is critical that banks implementing necessary changes remain on track for their compliance timelines. Whether a company is aiming for the mandatory Standardised Approach (SA) or the voluntary Internal Models Approach (IMA), the programs often represent a significant investment, requiring process, systems and cultural change. 

Drawing from its experience in helping banks meet the milestone set in their compliance timelines, Capco – a management and technology consultancy for the financial services industry – has developed an eight-point prioritisation framework for FRTB preparation and implementation. Natasha Leigh Giles, a Managing Principal at the consultancy, outlines the main dimensions of the framework: 

Prioritisation framework for FRTB

1. Front office operating model

For those who have already implemented the Volcker rule, the desks are well defined with monitoring and governance frameworks. However, for companies that have not been required to adhere to the U.S. regulation, there may be additional work involved in implementing desk-level controls as required under FRTB. The trading desk structure is especially important for banks planning to implement IMA, as this regime is applied at the desk level and requires that the full flow of the selected desk is able to pass the IMA requirements (including the modelability test for the risk factors). Key business decisions may be required if a desk trades complex products that are more aligned for SA treatment. 

2. Product scope

In order to reach the IMA status, products are required to be supported with additional data sets including historical market and reference data as well as risk factor pricing evidence. The opportunity for 2019 lies in refining the assessment on the feasibility of each product type to ensure a clear scope is agreed for the IMA environment. If the challenges are too complex or costly to overcome, such as access to historical market data, availability of price verification for the risk factors or significant enhancements to support computational capacities, then these products should be scoped out of the IMA program as soon as possible in order to save time and effort on continuing analysis. 

3. Client & trading activities

There is no need to wait until the FRTB implementation timeframe to undertake a holistic review of client and trading profitability – including the capital impacts. For example, running training and awareness campaigns within the front office can help the traders to understand the impacts of their activities and encourage changes in the way that they trade. By considering this holistically as a business and operational change, it can help keep the focus and resources on the primary (profitable) business in preparation for the compliance deadline. 

4. Internal controls

Methodology, reporting, auditability, and process governance for internal controls also need to be monitored in detail. We recommend having clearly defined processes accompanied by effective training across front-to-back office. For some banks, it will be beneficial to audit existing capital adequacy processes to ensure that findings are highlighted in advance of the implementation timeline and the appropriate focus is achieved within senior management.

5. Data & metrics

Financial institutions need to consider their overarching governance and ongoing management for the data (including ownership, quality control, golden source storage solutions, etc.) and the ongoing control framework for ensuring the data remains accurate and relevant for capital adequacy modeling. If there has not been a data lineage exercise already applied, this is a great opportunity to deliver business benefit, even in 2019. By creating agreed definitions, preferred sources, ownership and workflows for managing data quality, the benefits of more accurate data can already be applied to existing capital calculation models. 

Framework for FRTB

6. Model management & validation framework

In preparation for the FRTB regime, an opportunity for 2019 is to understand if there are gaps or control concerns to manage immediately. Model enhancements across SA and IMA will need to be productionized for output accuracy and refinement, however, these need to be maintained alongside existing Basel 2.5 BAU models and other concurrent changes e.g. LIBOR Transition. Business process optimization, testing environments and automation tools, documentation and model validation can all be reviewed for immediate benefits and prepare the process for a smooth implementation of the future FRTB models. 

7. Technology platform & testing environments

With regards to technology planning, the opportunity in 2019 is focusing on gaining agreement of the front-to-back FRTB future state architecture including the use of vendors as applicable. By ensuring a disciplined focus upon design and solution definition across all requirements, it provides a clear baseline for implementation planning and scheduling. Establishing a technology architecture which allows for FRTB data feeds, model enhancements, control definitions and accurate capital calculation outputs will provide the program with essential data and metrics needed for decision making. 

8. Leverging synergies

Once a baseline plan has been established, it is possible to identify synergies across other programs – such as the SA-CCR (Standardized Approach for Counterparty Credit Risk) or the IMM (Internal Models Methodology) – that could deliver overlapping benefits at reduced effort. Understanding requirements, defining the future state architecture, and implementing the change in a complex environment requires a mix of strategic principles and program management. Therefore, we consider it an opportunity for 2019 to take a centralized approach for data lineage and requirements gathering as this would be beneficial for optimizing capital costs across both the market and credit risk environment.

Conclusion

By considering each topic strategically in 2019, benefits such as data quality enhancements, strengthened internal controls and flexible test environments will not only bring immediate business value, but also set a solid foundation for a comprehensive FRTB implementation in the years to come. 

For more information on Capco’s model and the its approach in helping banks plan for FRTB, download the full whitepaper on the firm’s website.