The global financial sector has been through the wars in the last decade or so, to say the least. After the boom of the early 2000s was followed by the bust of the global financial crisis, the 2010s was subsequently characterized by a lot of soul-searching for financial services.
Moves were made to standardize global regulation, to throw light on the shadows and make sure there was nowhere to "hide" profits and losses. Transparency is now the keyword, and that means a host of new governance and compliance regulations for banks and other financial institutions to deal with.
But that also means more barriers to efficient operations, and more burden on the compliance and governance teams within financial services. Add to this the increasing disruption caused by technology ' and the security worries that follow suit ' and it's no wonder financial services institutions are concerned about operational resilience. How can players ensure they are strong enough to weather the next storm while still complying with the increasing pressures for transparency in operations?
4 key elements of operational resilience
A recent report by PwC and TheCityUK sought to define and identify the key threats to operational resilience in the UK's financial services sector, and to bring forward recommendations for both the industry and its regulators to help ensure the UK "remains a world-leader and at the forefront of regulatory development." The report's findings, though, can be taken as a guide for the global industry as we move into a new decade.
The report lists the four key elements of operational resilience in financial services as:
- Regulation and supervision
- A connected world
New ideas create risks and opportunities
"While the financial services sector has always embraced innovation, the current speed of innovation is not matched by the depth of understanding at a management level," writes PwC.
It's clear that legal operations professionals have a role to play in ensuring clear communications and robust training to ensure that all those with a role to play understand their part and are ready to take action. Innovation won't move any needles without being accompanied by an education program – this is the only way to ensure integration does not add complexity and additional risks, but instead presents opportunities for strategic growth.
The regulatory landscape won't get any easier, so be prepared
The financial services sector is no stranger to regulation, but the level of regulation to which it has been subject is only increasing. One reason for this increasing regulatory burden is to ensure operational resilience in financial services – to make sure there's less likely to be a collapse on a par with that of Lehman Brothers in 2008.
Operational resilience is, of course, a business imperative first and foremost, but, argues PwC, there is a role for regulation to play. The key is proportionality – just the right amount of regulation to support resilience but not stifle innovation. That's one of the reasons for the increasingly global approach to regulation, with movements including the OECD's Base Erosion and Profit Shifting (BEPS) and Common Reporting Standard (CRS) projects based around sharing information between countries and regulators.
The compliance team has a clear role here, given regulatory compliance is their responsibility. Financial services institutions must ensure the compliance team has the time and resources to keep up with the ever-changing regulatory landscape, and that the organization is flexible enough to move quickly when needed.
Digitalization is making global financial services more interdependent
One of the benefits of the move toward more digitalization in financial services is the need to break down silos and ensure better communication and cooperation between teams ' but these things don't happen overnight, and the interdependencies must be carefully managed both internally and externally.
By working better together, cross-departmental professionals can help to increase both the efficiency and robustness of the organization's operational resilience. It ensures less duplication of effort and more accurate entity data as a whole. Cross-sector collaboration also "improves understanding and enables more informed planning, both for individual firms and collectively," writes PwC.
It's here that sharing cultures and goals with third-party providers can help to support operational resilience. Ensure that across the supply chain and through all partnerships, everyone is working toward the same goal and making operating decisions based on the same data. Legal operations professionals will need to find a way to share information securely with stakeholders to bolster resilience.
Good governance is the golden thread that ties it all together
And, of course, underpinning all of these elements are strong governance practices. Modern governance is based on a system of cross-departmental working, strong communication and good quality, future-looking management information. The culture of the organization will play a key role in both good governance and in enhancing resilience, says PwC.
In a May 2019 report, the Diligent Institute measured governance practices using criteria related to shareholder rights, board composition and independence, and compensation; it found that companies with good governance outpaced the S&P 500 index, and outperformed the bottom fifth of the index by 17 points.
Organizations with a governance deficit have a lack of data, lack of visibility and lack of security across the board. Modern governance addresses these and other core issues, such as speed of access, by putting the necessary tools and intelligence at the fingertips of the board and stakeholders. It's important to ensure the compliance and governance teams are operating from a position of strength, with the necessary resources – in both manpower and technology – to keep them one step ahead of the game.
How entity management technology helps to improve operational resilience for financial services institutions
One of the biggest boosts to operational resilience for any organization is close and careful tracking of entity data – and with transparency and access to information as key to modern governance, it's best practice to create a central repository for the corporate record to empower all governance stakeholders to operate at full capacity.
Diligent Entities enables organizations to centralize and manage their corporate subsidiary data management to simplify entity governance throughout the organization, improving compliance and mitigating risk. It's about getting the right information to the right people at the right time to empower leaders to make better business decisions. The entity management software helps you to gain a competitive edge to improve governance by having the right information, analytics and insights to spot risks, seize opportunities and turn insights into action.
Diligent's entity management software seamlessly integrates with Diligent Boards and secure file-sharing platform to create the Governance Cloud, an all-in-one governance ecosystem that digitizes the various activities and tasks involved in modern governance.
Get in touch and request a demo to see how Diligent's suite of governance and compliance software can help to improve operational resilience for financial services.