Ernst & Young: transparency and control – Bill Schlich
Since the financial crisis first became apparent, the economy has entered a stage of huge transition. For the political and business class, that means plenty to think about - governments are being restructured, and whole finance departments reshaped according to new rules on what needs reporting and to whom.
For the banking industry, the emphasis on transparency, control and safety is here to stay. From the increased capital requirements of Basel III to the Dodd-Frank rules on derivative and proprietary trading, the new global regulatory framework presents a minefield of challenges.
"Coming out of the crisis, I firmly believe that more regulation is necessary and important," says Bill Schlich, global leader for banking and capital markets at Ernst & Young. "I think most people in the industry believe that, too. Whatever their views on regulation happen to be, all banks are having to deal with significant regulatory changes, and we expect that to continue for the foreseeable future."
Banks' holistic outlook
As well as the sheer scope of regulatory change, global banks also face the challenge of arbitrage between different markets and geographies. That inevitable fragmentation in rules and policies requires a fundamentally different type of approach to compliance.
"How do you implement change on a global basis in the most efficient manner?" says Schlich. "One way would be to approach each regulation and focus on each individually, but that's an expensive way of doing things. A better idea would be to look at your business on a holistic basis, evaluating the regulatory requirements on a global level. Those banks that are taking this approach are benefiting from it."
Alongside the heightened profile of compliance is an expectation that banks can accumulate, analyse and report data in a way that regulators can understand. They've already spent a lot of money in this area, investing in technology that can enhance their risk and reporting platforms.
"We're seeing a tremendous focus on making sure the systems and processes are as straightforward as possible," explains Schlich. "You need to make sure you're aggregating and analysing the same data, whether it's for financial reporting, risk reporting or management reporting. The goal is to do it in a way that makes use of one set of information across all the different reporting requirements."
One company, too many systems
Many of the emerging market countries in Africa and Asia aren't burdened by older, cumbersome IT infrastructures. But while they can go directly to the new high-tech systems, established banks don't have that luxury. A large proportion of international banks were created on the back of various mergers, with different companies carrying their own operational and technological biases.
"You need to make sure your systems speak the same language and are pulling together the same information," Schlich says. "Over time, there needs to be far less focus on manual intervention and spreadsheets. You have to get to a place that has a single source of clean data being used for various types of reporting."
While that kind of model offers long-run cost savings, it also requires a degree of foresight that is both challenging and time-consuming.
"Organisations need to be as nimble as possible," Schlich says. "If there's a new accounting standard coming out in the near future, you must be able to take that into consideration if your current system changes. That's not easy to do. If you think about all the regulatory, accounting and reporting changes occurring on a global basis, it's a real challenge."
C-level risk awareness
New levels of risk consciousness and accurate reporting have become a clear C-level concern since the financial crisis began. At the time, many senior executives did not have a clear view into the dynamics of risk and their far-reaching consequences. Since then, it's been an important topic for them, with genuine inroads made.
"We are seeing improvement in the level of awareness and understanding of risk," Schlich says. "But like anything else in a dynamic situation, it needs further improvement. It must be on the agenda of every single director - getting it done in a way that is as efficient as possible."
The focus on regulation may be at the top of the agenda for senior executives, but it hasn't distracted them from the fundamental question of growth. While the cost of compliance makes it hard to find sustained growth in a way that can satisfy investors, there are ways to improve balance sheet prospects.
"Whenever I sit down with a CFO, CEO or a chairman of the board, within the first 20 minutes the conversation moves to growth," Schlich says. "They're thinking about how to provide their customers with the best possible service that is still profitable for the bank. Various strategies are available. A lot of banks are looking at the customer and trying to find ways to understand and serve them better. They're looking at emerging markets as areas for potential growth and expansion. Growth is clearly a key challenge and it starts with understanding your core business."
"Various strategies are available. A lot of banks are looking at the customer and asking, 'How are they going to best serve and understand them?' Many are looking at emerging markets and asking, 'Where do they want to be in the next five years?' Growth is clearly a key challenge and it starts with understanding what your core business is."
Ernst & Young's banking and capital markets practise is by far the largest sector of the organisation. The company works across four different service lines - audit, tax, advisory and transaction services - in each case, focusing specifically on the financial services sector.
"That is our key differentiator," Schlich says. "Among the 'big four', we are the only one to have what we call the financial services office. This office focuses exclusively on the financial industry. We can provide our clients with a global solution and a financial services focus that they won't get from our competitors. We not only give you the right skill-set from an IT and risk perspective, but also a deep level of banking and capital market experience.
"I think we have the best risk and regulatory practice out there. Our global regulatory network, led by an executive team of former senior regulators, enables us to offer banks unparalleled experience, leadership and insights on financial regulations."
Whatever degree of sophistication the new regulatory infrastructure is capable of achieving, without basic cultural improvements, the banking industry is likely to stay stuck in the past.
"One of the biggest topics that we're talking about is culture," says Schlich. "What is the culture of the bank? How do you assess it, understand it and ultimately change it? In larger organisations, that's very difficult to do. A chairman of the board of a major international bank told me that if you want to change culture, you have to change people.
"Although that may not be necessary, certain things need to be done. You need to be customer-centric and risk-aware without losing sight of the fact that banks are risk-taking. It all needs to be done within the right parameters, transparently and with great communication."
Financial regulations: clarity required
The range and detail of new financial regulation is far from finalised. Many existing rules are yet to be completed and other fresh ideas are likely to come out over the next few years. That's proving difficult for some bank executives who don't believe they can move forward with their wider goals until the rules and levels of investment required becomes clearer.
"It's a challenging time," Schlich says. "There's a lot for today's banks to understand and implement. While all the new requirements come out, they must continue to grow. The returns of the past are certainly gone, and we don't yet know what the new norm will be; however, those banks that effectively link their business strategy to their regulatory strategy will have the competitive edge." ?