Regulators must 'be bold' and embrace innovation

05 October 2018

In an age of rapid technological advancement, regulators have been thrown into turmoil as to how best adapt their operations to continue monitoring their respective industries. A new report has urged them not to impede progress, however, and instead encourages them to embrace innovation.

A multitude of innovative technologies are presenting businesses with major opportunities to make their operations more efficient, as well as improving productivity. At the same time, regulators are struggling to bring their regimes up to speed without threatening to halt progress in their sectors. Exemplary of this is the blockchain scene, despite the potential of blockchain to help eliminate fraud from transactions and the supply chain.

More than eight in every 10 business and technology executives around the world have blockchain initiatives underway, but only one in four of these say their organisation now has a fully live blockchain implementation or pilot underway. As many as 48% of organisations cite regulatory uncertainty as a top three barrier to their blockchain efforts, while 27% list it as a top level concern, as they remain unsure of how a rapidly shifting regulatory scene for the new technology might change, or even scupper its effectiveness in the future.

How do you see regulators impacting innovation in your sector

Now, a report based on interviews with over 2,000 consumers, 500 regulated business, and 30 regulators, has warned that if regulators fail to adapt to these concerns, the consequences could be dire. According to the study from PA Consulting Group, amid a climate of fake news, consumer power, and rapidly evolving consumer expectations, regulators must be bold and remodel themselves as consumer champions, while continuing to fulfil their statutory duties. 

The paper found that respondents in all sectors are looking to regulators to support innovation, and to an extent most organisations are seeing this take place. The largest minority of 45% see regulators as enabling innovation, while 24% see regulators as driving innovation. At the same time, however, more than a quarter see regulators as blocking innovation. This comes as 95% per cent of organisations expect as much as 20% of business activity or revenue to be lost to new or disruptive businesses in the next five years.

Change needed

While regulators might be seen relatively favourably in the here-and-now by a large number of participants, then, the survey results warn against complacency from regulators. As long-term market incumbents battle to shrug off new challenges from agile digital disruptors in their sector, the majority are turning to digital transformation programmes. However, stringent regulation could scupper these efforts.

93% of businesses see a need for regulators to create a stronger sense of certainty for their sector

92% of businesses surveyed say that if regulators in their sector fail to evolve - in areas like processes, technology, manpower, and culture - they expect to feel a negative impact within three years. These companies anticipate an average revenue loss of 8%, should regulators not heed their advice. To that end, over the next five years, most want regulators to retain an enabling role, with nearly a third looking for regulators to drive innovation. That is particularly true in the financial services sector.

Regulators can further help businesses to plan for their future by provided a greater level of certainty regarding the guidelines for industries in years to come. Investment in digital transformation can be costly and time consuming, and the fear that such efforts could be rendered useless tomorrow by a change in rules often hampers transformation projects. As a result, 93% of businesses polled call on regulators to create a stronger sense of certainty for their sector.

Commenting on the results, Conrad Thompson, business transformation expert at PA Consulting, remarked, said “Regulators cannot… be complacent. Regulators need to be far more purposeful in their role as champions of the public. They need to be more comfortable with trying new approaches and techniques and being agents of change rather than burdens in their industries. More than ever, they need to be prepared to take risks and occasionally admit to past mistakes.”


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

02 April 2019

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.


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.