Abstract

In fast-evolving regulatory environments, financial institutions face the uphill tasks of regulatory compliance and reporting—as failure attracts severe penalties. What can financial institutions do to ensure they are in line and in time with these non-negotiable regulatory requirements? The answer rests in optimized infrastructure, technology, and trained personnel to ensure effective, efficient, accurate, and documented compliance processes. This helps business navigate regulatory environments smoothly, ensuring robust business processes, enhancing customer satisfaction, and increasing revenue and profits.

Digitalize Reporting: Master the ChangingRegulatory Environment

www.niit-tech.com

At the Heart of Automated Reporting

Success

Big Brother is Watching—The Premise of Regulatory Compliance

With numerous new laws, regulations, and regulatory expectations, external reporting requirements for financial institutions are continuously evolving. In order to provide transparency within the financial system, Banking, Financial Services and Insurance (BFSI) companies must automate regulatory reporting processes to deliver data quality and accuracy. According to a survey in 2012, only 25% of banks had an automated regulatory reporting process, while 75% still continued with manual or partially automated regulatory compliance systems. This paper elucidates key trends in regulations and discusses how technology can help financial institutions comply with ever-evolving regulatory requirements.

Regulators face extreme challenges of collecting, processing, and reporting information efficiently and accurately. Ever-expanding regulatory initiatives such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, BASEL III, AML, etc. with increasing demands to report more and report, at once, intensify these challenges. These regulatory initiatives make it imperative for firms to improve the value of information collected and reported, and manage change effectively and efficiently, staying up-to-speed with the changing economic environment.

Surveying the Regulatory Terrain: Key Regulations and Trends

In the aftermath of the financial crisis in 2007-08, there was a pressing need to bring changes in the regulatory system. Some of the key regulatory initiatives that ushered sweeping changes in the system are:

1. Foreign Account Tax Compliance Act (FATCA) FATCA is more than a regulation or a compliance requirement—it covers the entire banking value chain. It was enacted in the US in March 2010, and is intended to prevent tax evasion by US citizens by using offshore accounts. This compliance requires US citizens/residents to report their overseas financial accounts, and foreign financial institutions to report their US customers to the Internal Revenue Service (IRS). FATCA taxes US citizens/residents on their worldwide income. However, if a person is working in a foreign country, then FATCA gives a flexibility to exclude a limited amount of foreign income from the total income.

All non-financial intermediaries and agents owning or holding US investments have to satisfy information reporting and disclosure requirements of FATCA (as of January 2014). This US legislation impacts tax functions, technology systems, operations, and business strategy of organizations.

Report PreparationAnalytics and Review

Figure 1: Data Based on Federal Reserve Suggestion

Key Highlights

Harmonized with inter-governmental agreements

Relaxed documentation and due diligence requirements

Liberalized requirements for retirement funds and savings accounts

Limited relief for Foreign Financial Institutions (FFIs)

How Technology Facilitates FATCA Compliance

Financial institutions must make significant changes in technology to consolidate and automate processes and procedures to be able to implement systems that can help them be FATCA compliant. They must reassess the current state of the systems and operations, conduct gap analysis, develop action plans, and evaluate the legal entities to determine whether they are covered by FATCA or not.

Data mining helps minimize the number of times information is needed from the client for data

analysis. The technology partner uses business intelligence tools to customize different types of data analyses. An important type of data analysis for FATCA is link analysis. Link analysis enables clients to bring together disparate data. Technology is used to find out the common elements from the available disparate data, allowing financial institutions to connect and group data to a centralized location. Technology also helps in data sharing and automating data masking.

2. Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act)The Dodd–Frank Act brought significant changes to financial regulation in the US. To protect unsuspecting borrowers against abusive lending and mortgage practices, the Dodd Frank Act established federal financial regulatory agencies and directed the financial services industry to monitor banking practices and troubled financial institutions. It contains roughly 1,500 provisions, including about 398 rule-making requirements.

Key Highlights

Protects US citizens from abusive financial service practices

Eliminates the ‘too-big-to-fail’ concept to ensure that taxpayers do not bear the consequences of the failure of financial institutions

Ensures that advanced warning systems are created in order to deal with any economic crisis

Brings transparency in the derivatives and instruments market, and avoids chaos

Increases accountability of credit rating agencies for debt instruments

Ensures top executive decisions are aligned with the interests of the financial institution

Regulatory activities on the Dodd Frank Act in 2013 included:

Financial Stability Reform

Resolution Planning

Securitization Reforms

Derivatives Regulation

Investor Protection Reform

Credit Rating Agency Reform

Volcker Rule

Compensation, Corporate Governance and Disclosure

Capital Requirements

Foreign Bank Regulation

Consumer Protection Reform

Origin of Mortgage and its Servicing

Specialized Corporate Disclosures

FutureDeadline: NotProposed, 63

FutureDeadline: Proposed, 5

MissedDeadline: NotProposed, 64

MissedDeadline: Proposed, 111

Finalized, 155

Figure 2: DFA Rulemaking Progress as on July 1, 2013

As of July 1, 2013

How Technology Facilitates Dodd-Frank Act Compliance The Dodd-Frank Act impacts different lines of business in the financial services industry. To comply efficiently and effectively, the technology partner must assess the new rules and regulations, tools, and processes it currently has—and build new IT systems integrating old processes within the existing platforms. New IT systems will contain measurable, transparent, and predictable processes that reduce costs across the different business lines. The technology partner

Implements pre-trade compliance checks enforcing system restrictions

Rationalizes and consolidates to achieve true copy of the data, and supports regulatory reporting

Places special emphasis on data management, business intelligence, risk analytics, and knowledge management

3. BASEL III Basel III (or the Third Basel Accord) builds on Basel I and Basel II documents by the Basel Committee on Banking Supervision. Basel III enhanced the banking regulatory framework and dealt with financial and economic stress, risk management, liquidity in the market, and banks’ transparency. The two liquidity ratios—the short-term Liquidity Coverage Ratio (LCR) and the longer-term Net Stable Funding Ratio (NSFR)—increase the high-quality liquid assets of banks and obtain stable sources of funding. These liquidity ratios ensure adherence to sound principles of liquidity risk management.

LCR incorporates amendments in the expansion of the assets considered as High Quality Liquid Assets (HQLA) and net cash outflows to reflect experience in times of stress. The new LCR was implemented in a phased manner, starting January 2015. Implementing LCR on an ongoing basis helps monitor and manage liquidity risk. An LCR of 60% should be maintained in the first year of its implementation, gradually climbing by 10% each year until it is implemented at 100% in January 2019.

Figure 3: Basel III Phase in Arrangements

and exchange markets. It offers regulatory services to all the security firms that publicly conduct business; organizations that offer professional training, testing, and licensing of registered persons, arbitration and mediation, market regulation by contract for the NYSE, the NASDAQ Stock Market, Inc., the American Stock Exchange, LLC, and the International Securities Exchange, LLC; and industry utilities, such as Trade Reporting Facilities and other over-the-counter operations.

FINRA uses Internet, media, and public forums to help investors build financial knowledge. It also provides essential tools to improve the understanding of the market and principles of investing. In 2013, FINRA considered the following for heightened scrutiny: Business Development Corporations, Leveraged Loan Products, Commercial Mortgaged-Backed Securities, High Yield Debt, Structured Products, Exchange Trade Notes, Non-Traded Real Estate Investment Trusts (REITs) and Closed Funds.

Key Highlights

Regulates trading in equities, corporate bonds, and security futures

Licenses individuals and admits firms to the industry, writes rules to govern their behavior and examines them for regulatory compliance

Sells regulatory products and services to stock markets and exchanges

Provides educational and qualification examinations

How Technology Facilitates FINRA Compliance

FINRA guidelines require financial institutions to partner with firms that help them establish a strong social media policy that evolves with the changes in industry regulations and technology. The partner helps the organization build a social media policy by identifying the social media platforms aligned with the organization’s business goals.

Key Highlights

Improves the ability of financial institutions to deal with issues arising from financial and economic stress

Improves risk management and governance

Strengthens transparency and disclosures of banks

How Technology Facilitates BASEL III Compliance

The technology partner focuses on improving the data management practices that require financial institutions to aggregate, standardize, and analyze data to derive high quality information and reports. When the data management levels required by Basel III are achieved, the technology partner deploys advanced analytics to achieve process efficiency.

In the past, data was managed in silos. To comply with Basel III, financial institutions need to manage the quality of the data extracted from the ageing infrastructures. There is a need to develop the IT systems that produce and manage consistent, accurate, and true copy of the data from disparate systems. The technology partner installs IT infrastructure that is flexible and robust, and quickly integrates data from disparate systems and builds quick interfaces.

4. The Financial Industry Regulatory Authority (FINRA)FINRA is a self-regulatory organization that oversees financial regulations of member brokerage firms

5. Anti-Money Laundering Laws (AML)AML is a set of procedures, laws or regulations used in the financial and legal industries to prevent, detect, and report illegal money laundering actions. According to a survey in 2012, 41% of organizations have integrated AML in the business strategy of new products/services.

AML came into effect after the Financial Action Task Force (FATF)—an intergovernmental body—was formed and anti-money laundering standards were laid out. New government regulations and ever-evolving laundering techniques keep AML compliance departments constantly on their toes, trying to deal with change.

The Anti-Money Laundering and Countering of Financing of Terrorism (AML/CFT) was amended on a makeover, effective from June, 2013.

Key Highlights of the Amended AML Regulation:

Amendments to the ordinary course of business exemption that applied to accountants and others, including directors, employees, agents and other personnel.

New Regulation 5A required enhanced customer due diligence to be carried out for transactions requiring Suspicious Transaction report

Changes were made to the customer due diligence exemption and extended to client funds account

How Technology Facilitates AML Compliance

Financial institutions are reacting to regulatory demands and investing in automated systems that

can monitor every single financial transaction, discover unusual behavior, and discover transactions that seem to be money-laundering ones. Automated systems leverage data from disparate systems and can help verify new customer identities and perform link analysis to understand the background of the customer. These systems must learn and adapt to the situations, while analyzing client profiles and their transactions, improving cost and operational efficiencies.

Financial institutions need to partner with technology firms that can provide technology platforms based on the product- and risk-specific requirements. There is no need to replace existing systems. The new platforms must integrate tightly with the existing applications maximizing previous technology investments. As risks and rules change, the designed platform must be agile enough to adapt. Changes may include product changes, mergers and acquisitions, and working in a new geography. A technology partner helps in maintaining these new systems and supports the business in achieving cost efficiencies and customer satisfaction.

6. Know Your Customer (KYC)

KYC regulation is important for both financial institutions and regulators to ascertain relevant customer information. These policies help prevent identity theft, financial fraud, money laundering and terrorist financing. Seven out of 10 Indian financial services firms do not regularly update the know-your-customer (KYC) details, as per a KPMG survey of 2012 on anti-money laundering.

Key Highlights

Four key elements are incorporated by financial institutions while framing their KYC policies:

Customer Acceptance Policy

Customer Identification Procedure

Transaction Monitoring

Risk Management

Identity information helps financial institutions understand the capacity of individuals to engage in money laundering or identity theft. Daily transactions of individuals are monitored against their expected behavior and recorded profile.

How Technology Facilitates KYC Compliance

Global footprints of financial institutions necessitate the need for global KYC hubs with data to cater to various regulations. The data in these hubs must be reusable to enable better flexibility and scalability. Reusable data reduces the overall cost for financial institutions. Global KYC hubs help in automating business processes, improving efficiency, enabling rapid turnaround and reducing operational risk. Automated processes ensure all required and correct data is captured—managing the risk of regulatory non-compliance.

7. Markets in Financial Instruments Directive (MiFID) MiFID is a European Union Law that aims to increase cross-border investment orders. Its main objective is to increase competition, create

harmonization across jurisdictions, enhance financial transparency, and protect customers of investment services. MiFID covers investment banks, portfolio managers, corporate finance firms, and some derivative and commodity firms.

Figure 4: MiFID related regulations

Dodd-Frank

EMIR LocalRegulations

Basel III

UCITSMAD MiFID II

infrastructure ramps up significantly to handle increase in data flow and manage the data exchange mechanisms.

8. Emergency Economic Stabilization Act (EESA)

The Emergency Economic Stabilization Act of 2008 is a US financial system law enacted to regulate international credit and subprime mortgage crisis. The regulation authorizes the United States Secretary of the Treasury to disburse more than $700 billion for the purchase of distress assets and for supplying cash directly to banks. It also allows companies to insure their troubled assets.

EESA has authorized the Secretary of the Treasury to establish a Troubled Asset Relief Program (TARP) to protect consumers and businesses when securing credit. The purchase of illiquid assets by the Secretary of the Treasury under TARP increases the confidence of banks in the credit market.

Key Highlights of MiFiD

Authorized firms regulated in their home states can provide services to customers in other EU member states

Clear procedures are adapted to categorize customers as ‘eligible counterparties,’ professional clients or retail clients

While taking trade orders, detailed client information needs to be captured

New post-trade transparency and capital requirements in transactions are extended to financial instruments

Firms need to publish price, volume, and time of all trades of the listed shares

Firms must obtain results in the client order execution

MiFID treats Systematic Internalisers as mini-exchanges for pre- and post-trade transparency requirements

How Technology Facilitates MiFID Compliance To comply with MiFID, a technology firm has to alter its marketing practices, rewrite customer contracts, and deeply assess the client needs. To do so, it must be capable of retaining and integrating information to plan for and implement technology requirements. The firm manages the information lifecycle to easily access information and include indexing for faster and accurate searching. To implement the MiFID regulation for a financial institution, the technology firm upgrades the network infrastructure and communication lines to enable acceptance of data from multiple sources. The upgradation is flexible enough to handle the new, evolving business rules and data elements. Along with the infrastructure, the technology firm also upgrades the storage systems. Storage

generate balance sheet growth and reduce provision of liquidity. Financial institutions also need to invest in technology to be on top of regulatory requirements. The current IT infrastructure is only capable of supporting earlier regulatory requirements. There is an urgent need to bring significant architectural changes to adapt radically to the evolving regulatory landscape and exercise control over the key individual business functions.

Regulatory compliance programs generate considerable data into disparate silos. To properly manage and generate intelligent data, there is a need to have a unified data management system to reduce risk and maintain regulatory compliance, and use appropriate technology and tools for fast access to granular information. Without appropriate technology and tools it is difficult to understand the background of data, measure, and monitor compliance programs, and generate the right kind of reports for higher management. Technology, thus, implemented appropriately to monitor and manage compliance programs not only drives down cost but also drives up revenues.

Banks and financial institutions that use technology are real winners in the capital markets as technology helps build stronger relationships with the client. Continued investment in technology, user-friendly channels such as mobile, Internet, and social media help these institutions provide excellent customer service.

Key Highlights

Provides authority and facilitates restoration of liquidity and stability in the financial system

Allows TARP to purchase troubled assets from financial institutions

Imposes limits on executive compensation of participating financial institutions

Monitors the activities of the Secretary of the Treasury

Protects homeowners

Technology Makes All the Difference

Leading financial institutions evaluate their current regulatory infrastructure and think of refining tools and capabilities to adjust to the current regulatory landscape. Institutions are progressing from regulation to transformation to position themselves and achieve success. Control functions must be used to ensure compliance and support transformation change in key business processes. To support transformational change, it is mandatory to identify and assess inter-relationships between regulatory initiatives, develop business and structural models in compliance with new regulations, and changing customer needs through innovation and investment.

The pressure on financial institutions is to ensure that they meet regulatory requirements at an appropriate time. To meet these requirements, they need to carefully plan for improved economic conditions that

Managing Risk and Compliance Challenges

Financial institutions that choose state-of-the-art technology to manage regulatory requirements keep defining their business by:

Automating regulatory reporting processes to minimize the manual work

Building a team that can handle changing requirements and help train the personnel

Optimizing governance structure and control environment within the regulatory function

Enhancing and evolving business processes with changes in the regulatory environment to enhance flexibility, effectiveness, and keep pace with the regulatory demands

Three steps that a financial institution must consider overcoming the challenges in areas of risk management and regulatory compliance are :

Unified Data Management Platform: Unified Data Management Platform delivers data integrity and quality to support regulatory compliance. With an

integrated and unified platform, financial institutions can perform data mining, data profiling, and monitoring. It also helps in transforming data silos maintained in disparate systems into reliable, accurate, and trusted data.

Optimization: Optimizing regulatory structures enables financial institutions to implement changes in the regulatory landscape within a specified timeframe and aligned with short- and long-term objectives. This can be achieved through incremental and innovative improvement to the supporting technology.

Standardization: Regulators everywhere face the challenge of collecting, processing, and reporting information accurately and effectively. In order to overcome this challenge, e-filling is a standard tool that regulators must choose to improve the entire end-to-end regulatory reporting process. Financial institutions achieve greater transparency and efficiency while collecting relevant information. This standardized reporting tool can easily support the changing needs of the regulators.

The NIIT Technologies Thought Board:Digitalize Reporting: Master the Changing Regulatory Environment

Why is it Paramount for Financial Institutions to be on Top of Regulatory Compliance?

What Challenges do Financial Institutions Face in Managing Regulatory Compliance?

Multiple regulations at various stages of development and implementation

Diminished returns and rising costs due to outdated and/or

limited processes

Aligning business and strategic choices to the new regulatory environment

What are the Key Benefits of Technology in Managing Regulatory Compliance?

Regulatory compliance promotes customer

acceptance and trust

Inclusion of applied technology in business analysis, reporting,

investment product design, sales & marketing, customer

insights, and customer service produces excellent results

Equipping employees with the necessary tools and

training results in operational excellence and

higher employee satisfaction

Provides competitive edge

Marks the firm as a leader in the BFSI space

How can Technology be Leveraged to Manage the Regulatory Environment?

minimize manual systems and

automate regulatory reporting

Financial institutions need to:

Regulators can choose e-filing as a standard tool to manage the challenge of collecting, processing, and reporting information accurately and effectively

build and train a team to manage

regulatory requirements

optimize governance and

control in the regulatory function

evolve business

processes with the changing

regulatory environment

employ a Unified Data Management Platform to deliver data integrity and quality to support

regulatory compliance

innovate and improve the supporting

technology to optimize regulatory

structures

Regulatory reforms drive strategic and operational change in the capital market industry. Financial institutions change their ways of working and adapt every time a new rule–regional, national or global–is enforced.

Ineffective use of big data

Changing their culture and behavior, taking difficult decisions and implementing them effectively to restore customer

confidence and trust

Partners in Change

Banks and financial institutions need to invest in the infrastructure and leverage technology to ensure effective, accurate, and documented compliance processes. The investment should be timely, aligned with the current regulatory environment and periodically monitored so that financial institutions are able to keep pace with the changing needs.

Our service areas address business processes, data quality, and technology architecture to support the regulatory reporting processes. We manage the regulatory reporting requirements and accuracy of numbers quickly and easily. We help simplify the processes required to produce clients’ financial views besides facilitating the production of fully reconciled financial reports at all levels of granularity.

Building technology infrastructure and business systems to manage regulatory compliance are complex tasks, and best achieved in partnership

through an experienced IT solutions provider having a grasp of leveraging technology to manage regulatory environments.

Our domain expertise, thousands of person-hours of experience, and a proven track record of efficiently and effectively mobilizing technology will help you match pace with the regulatory environment. As preferred technology partners, our clients values us for:

Understanding and foreseeing regulatory changes, technological advancements, and process limitations

Understanding the needs of financial institutions to be regulation-compliant, and analyzing the challenges they face with compliance as well as with using technology to manage them

Designing and delivering systems and tools that not only help compliance but also leverage the investment to deliver value across different business functions

For more information, contact marketing@niit-tech.com

© 2019 NIIT Technologies. All rights reserved.

NIIT Technologies is a leading global IT solutions organization, enabling its clients to transform at the intersect of unparalleled domain expertise and emerging technologies to achieve real-world business impact. The Company focuses on three key verticals: Banking and financial services, Insurance, Travel and Transportation. This domain strength is combined with leading-edge capabilities in Data & Analytics, Automation, Cloud, and Digital. With over 10,000 employees serving clients across Americas, Europe, Asia, and Australia, NIIT Technologies fosters a culture that promotes innovation and constantly seeks to find new yet simple ways to add value for its clients. Learn more about NIIT Technologies at www.niit-tech.com

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