'Perfect storm' hitting Scots firms

Glasgow-based AutoRek is helping financial services firms tackle a '˜perfect storm' of regulatory and technical change.

The pace of change is challenging for some firms.

The financial crash of 2007-2008 changed the financial services landscape forever. Regulators were no longer prepared to tolerate what was seen as a rather laissez-faire approach by firms to handling and reporting their data.

The shift towards much greater transparency led to the European Parliament adopting the revised Payment Services Directive (PSD2) in October 2015. Less than a year later, so-called Open Banking arrived as the UK’s Competition and Markets Authority (CMA) issued a ruling that required the nine biggest UK banks to allow licensed firms direct access to their data, right down to the level of specific transactions.

There was a clear message being sent out: the banking industry was not open enough and customers deserved more choice and more protection.

With the General Data Protection Regulation (GDPR) coming into force at the end of May 2018, there was a fundamental power shift away from larger financial institutions in favour of consumers.

It’s a backdrop of significant regulatory change that has created what some have described as a ‘perfect storm’ for financial services firms.

“We are all aware of the fast pace of technological change and the challenges that presents, but it’s more than that – it’s also the pace of regulatory change,” says Gordon McHarg, Managing Director of Glasgow-based software provider AutoRek. “This presents a major and simultaneous challenge on two fronts – coping with the pace of tech change, while keeping on top of the demands of the regulator.”

McHarg says that one significant change has been the need to reconcile financial information much more frequently than before.

From reporting at weekly or even monthly intervals, any firms involved in high-level transactional business have had to move towards much more frequent reporting, and to make more efficient and transparent their management of data and financial controls.

“The crash of 2007-2008 - and what followed - changed everything,” says McHarg. “Financial organisations were suddenly subjected to very significant regulatory pressures. Many of the processes they had in place previously were no longer fit for purpose.”

Open banking has created opportunities for fintech businesses to tap into rich data streams that the large banks (and others) held for years. The opportunity for AutoRek was to provide software platforms to manage that data, alongside its knowledge of regulatory reporting and financial controls.

This helped to address one specific challenge presented by the technological and regulatory changes - the need for greater speed - but highlighted a broader problem for traditional financial services organisations: getting the right people.

“There was the increased need for speed – executing the new regulatory requirements in a timely manner - and the additional problem of the lack of skilled people available to do that,” says McHarg. “Or, if you prefer, both a resource challenge and a growth challenge.”

This is where smarter working came in, with firms who understood the need to automate their processes quickly starting to gain a competitive advantage.

“It’s about moving over to intelligent automated solutions and allowing people to optimise their time and deal with problem-solving, which still requires human input, rather than wasting those human resources on manual processes which can clearly be automated,” says McHarg. “It’s also about making sure that employees fully understand what they are doing and why they are doing it.”

One area where regulation is really driving the pace of change – and demanding much greater scrutiny of processes – has been in the asset management sector. The need to protect client assets remains paramount. This is nothing new, as highlighted by the collapse of Lehman Brother almost 10 years ago. The difference is the increased level of scrutiny that is currently focussed on the sector.

McHarg stresses that new entrants to the market - like peer-to-peer lenders and crowd-funders - are also subject to regulation if they are offering financial products.

He says: “They are bringing new and innovative products to the market - but need to ensure they are also meeting the regulatory requirements of the industry and are protecting client data in the same way as large asset management businesses.”

Find out more on the AutoRek website.