Regulatory standards across all industries are constantly changing. National and EU regimes often overlap adding a layer of complexity and leaving executives in a minefield of business risks. Faced with evolving legislation, ambiguous definitions and shifting deadlines, these executives are responsible for ensuring that their companies’ activities comply with the increasing regulatory burden. This is where technology can make the difference. Here are three examples of heavily regulated sectors where the use of industry-specific software is helping to address the problem:
Utility companies are subject to a high level of public attention and it is therefore highly important that they adhere to regulatory standards set by various EU directives for the majority of their activities: back office operations, health and safety, treatment facilities, waste management, distribution, quality standards. The list could go on.
Additionally, utilities also conduct trading activities which leave them exposed to numerous risks. Purchasing from multiple grids, accounting for environmental activism (Germany has for instance recently announced that it will no longer use any nuclear power) and committing to the use of renewable sources – which are only reliable in certain weather conditions – are just some of the many aspects that need to be factored in when gauging risk.
Compliance and risk assessment failure can result in loss of business, fines and negative publicity. The best way to minimise risk is to take a bottom-up approach to interpreting data and records from various sources using automated systems like rules-based engines, business process models and quantitative analytics.
EU regulators created the Markets in Financial Instruments Directive (MiFID) to increase competition and consumer protection in financial services. Bearing in mind that the costs of not complying are huge, from government fines to loss of reputation, the challenge is how to balance the seemingly ever-increasing number of compliance issues with the running of a business.
From cyber security to in-house operations, from internet banking to self-pay kiosks, new technologies have dramatically changed the way we do banking and raised customers’ expectations. Automation is needed to innovate and simplify customer services but also to prevent compliance incidents and manage risk as much as possible. Financial services require reliable and secure transmis¬sion of sensitive information. Their business involves the real-time exchange of data and files in different formats with many parties and across different business lines. Complex processes involving data access and transformation need to be automated to eliminate operational man-made errors, delays or data breaches across Chinese Walls.
Exposure to risk is a daily certainty. The ability to identify the inherent risk in products and services and to mitigate controls to reduce that risk to the lowest possible level will help manage and monitor compliance performance efficiently and effectively in any financial institution.
In addition to MiFID, EU regulators introduced a bifurcated regime (EMIR and REMIT) to address potential manipulation in commodity trading. These last two are rolling out now but even as they complete their implementation phase, MiFID II threatens to add to the compliance burden for commodity traders, whilst making it harder for businesses to operate under a hedging strategy. The implications are far reaching and require a technology response.
There are alternatives in terms of what energy and financial services CIOs can do now to prepare for MiFID II. Managing the process by spreadsheet is not one of them. There are electronic reporting and data storage requirements involved in each set of regulations that will quickly overwhelm manual processes.
Outsourcing may be a solution, but it comes with its own costs and risks: do you really want to outsource a liability you will ultimately be held accountable for should any errors or delays in compliance occur?
That leaves accepting higher energy prices by abandoning a hedging strategy altogether, or automating the process by employing a flexible, comprehensive software that allows you to upgrade and manage your regulatory compliance process quickly and manage risk.
Another qualifier to consider is the ability to install software on a captive system and maintain it internally, or purchase a software-as-a-service (SaaS) contract and maintain it virtually in the cloud. Implementing this option could affect your overall total cost of ownership as you integrate the system into other areas of the business.
Direct connectivity to trade repositories should also be a core capability, including all required regulatory identifiers and formats. The system should be able to simplify the threshold monitoring for non-financial counterparties (e.g. energy intensive businesses operating a hedging strategy) and facilitate risk mitigation obligations, including EMIR’s requirement for periodic portfolio reconciliations.
Critically, technology can also help determine a higher level of risk assurance which today should be high on any organisation’s agenda. There are undoubtedly challenges to introducing new technology but, if applied intelligently and integrated with existing systems, an industry-specific software seems like the most accurate, reliable approach to meeting the requirements of evolving regulatory standards.
By James Brown is senior energy consultant, EMEA at Allegro Development