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Leading banks are moving beyond a compliance focus to explore how developing regulatory inventories could provide a strategic advantage.
Two questions to ask
- How can firms make better use of their investments in regulatory inventories to influence strategic and operational decisions?
- Can regulatory inventories potentially speed up go-to-market timescales and give firms a competitive advantage?
Keeping up with regulatory requirements has been increasingly challenging for financial services (FS) firms, reflecting the pace of change and complexity of content. As a result, major FS firms now maintain regulatory inventories of the laws, rules and regulations (LRRs) that apply to their business. Firms are now beginning to consider how regulatory inventories could evolve from pure compliance tools, into competitive advantage platforms to support firm strategy and execution.
The recent EY survey of 10 global FS firms reveals how banks’ approach to the maintenance and use of these inventories is maturing. From simply keeping an eye out for developments, firms have progressed to keeping a detailed record of regulatory requirements and then to mapping – or connecting – those requirements back to the business.
The nature of that mapping is also evolving, as firms connect regulatory requirements to more elements of the business – not only to policies that address regulations, but also to the related risks and to the controls established to mitigate those risks.
Maintaining such a large data set is challenging, given the volume of new regulations and the pace of change. As a result, we found that FS firms are applying a risk-based approach to the scope of their inventory, its structure and the granularity of content, and to their mapping programs. They are also exploring how to make better use of technology for inventory maintenance and mapping.
We also see a growing recognition of the greater potential offered by regulatory inventory programs. Although these started out as compliance exercises focused on minimizing potential breaches, some firms are beginning to consider how they could provide a more strategic and operational competitive advantage.
Firms are now beginning to consider how regulatory inventories could evolve from pure compliance
tools, into competitive advantage platforms to support firm strategy and execution.
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Chapter 1
Inventory scope and granularity
Some banks are developing comprehensive regulatory inventories containing varying levels of detail.
The majority (70%) of banks EY teams surveyed have inventories that cover all geographies in which their firm operates. However, 20% cover a broader global footprint while, at the other extreme, 10% include specific or priority jurisdictions where the bank has a presence.
We found some striking variations in terms of sector scope. Although all banks cover applicable FS regulations, 10% include only specific applicable regulations issued by FS regulators. These are the regulations deemed high priority – as determined by factors such as impacted business scale or regulatory activity.
Over half of participants’ inventories include regulatory publications issued by non-FS regulators. In some cases, these non-FS regulations were only included if seen as having a significant impact, but 40% of participating banks maintain inventories that include all applicable regulations across both FS and non-FS markets. Accountability for the maintenance and assessment of non-FS regulatory content generally rests with functions outside compliance, such as HR and finance.
Some banks are including an impressive level of granularity in their regulatory inventories. As might be expected, all participants cover primary in-force LRRs that impose obligations on the firm. The majority also include supporting publications, such as regulatory technical standards.
However, 20% include information or supplemental publications that do not directly impose obligations on the firm, such as guidance or interpretative statements, interagency memos, and Q&As or FAQs. One consistent challenge identified by participants is the extent to which ad hoc publications such as “Dear CEO Letters” should be included in inventories where they set out additional expectations beyond formal LRRs.
EY Regulatory Inventory survey
This is an industry analysis of how FS firms structure, manage and maintain inventories of the
LRRs that apply to their business.
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Chapter 2
Mapping to business information
Firms gain more value from inventories by mapping contents to business elements.
A risk-based approach is widely applied in banks’ approach to mapping the regulatory inventory to business information. One participant told us, “We prioritized the mapping program by a combination of regulator, jurisdiction, and topic themes. Higher-risk regulators from larger jurisdictions were mapped first.”
Almost all (90%) of the banks we surveyed map to some form of business unit and the same proportion map to business policies. At the more advanced end of the spectrum, 70% of banks map to risks and over half of participants map to controls. A small number also map to a process library.
We found that some banks maintain smaller, more focused inventories mapped at a granular level, while others have created larger inventories focused on mapping for priority regulators and jurisdictions. There are some geographical variations too, with non-US banks more likely to map their regulatory inventories to other business information, namely risks, than their US counterparts.
The more granular the mapping, the more use or value banks can obtain from regulatory inventories. For example, mapping obligations to controls can help to identify potential areas of weakness where a breach might occur. This can also improve the speed and effectiveness of any response to an actual control failure from a regulatory perspective, e.g., making required regulatory reports or taking steps to protect client assets. Similarly, if specific obligations are mapped to business units, the greater the opportunity to use that information to inform strategic decisions and embed specific obligations into systems and processes, as well as products and services.
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Chapter 3
Untapped technology
Banks see the potential for technology to improve inventory value, but few have yet to apply it.
A number of FS firms expect technology to play an increasing role not only in maintaining reliable regulatory inventories, but also leveraging them to support the firm’s operational and strategic objectives. Most acknowledge the significant amount of “manual lift” involved in current maintenance and mapping activities. But firms are starting to look at a range of technology solutions, including natural language processing (NLP) and artificial intelligence, to not only process regulatory information, but also interpret its content and suggest appropriate actions. Such activity is in its infancy, however.
As well as the “push” to improve compliance and reduce risk, firms are also responding to the “pull” from regulators for a more technology-focused approach to regulatory compliance and reporting. The focus on technology recognizes the interest of regulators themselves in automated solutions. Firms see benefits from aligning with regulators’ direction of travel, where regulations will increasingly be machine readable – or even machine “consumable”, so that machines not only read the regulatory content, but act on instructions for applying it.
Summary
Firms are increasingly exploring how they can make better use of their investments in regulatory inventories – so that the implications of specific regulatory obligations influence strategic and operational decisions in the business. Some banks are looking at how they can use the information in their regulatory inventories to shape the development of new products and services. Accurate, mapped and automated regulatory inventories – that can quickly identify all relevant regulatory considerations – could potentially speed up go-to-market timescales and give firms a competitive advantage.