Regulations: Adapting to the constant but shifting landscape

A myriad of regulations has challenged the buy-side industry and the storm doesn’t seem to be slowing down anytime soon. What seems to also be clear is that regulators are not giving any respite to the firms they govern as to their implementation dates. For example, the implementation date for RegBI was 30 July  2020 and this has not changed despite the pandemic, US elections or other unprecedented global scenarios. The situations in Europe are not so different.

The biggest issue which the buy-side faces is the intense cost reduction pressure due to dwindling fees on products and tight operating margins which are weighing firms down. This requires applying controls and acquiring new skills which were never before applicable. Where IT systems have not been overhauled by technology changes, as has been the case with sell-side counterparts, there is always a significant amount of work involved with even with a small regulatory change that needs to be incorporated. An example of this is the Required Minimum Distributions (RMD) age increase from 70-1/2 to 72 years under the SECURE Act which went into effect in Q1 of this year. With disjointed payment systems and reporting systems, and client-facing systems, this change implementation has, in some cases, taken more than four months. This delay in implementation can cause direct reputational damage and carries the risk of non-compliance and customer frustration.

The complexity of buy-side regulations is heightened with operations across geographies leading to regulatory arbitrage. Even internally within the US, with the compounding tussle between the Feds and the States, there are regulations that are conflicting in some cases bringing about an increased risk of non-compliance.

Where is the change coming from?

The advent of Big Data and Artificial Intelligence, and the growing proliferation of Fintech companies is changing the way regulatory challenges are approached. Third-party vendors that are continuing to be leveraged heavily within the buy-side industry have already started to implement features and processes by embracing newer, digital technologies. Asset management firms, large pension funds and hedge funds have traditionally relied upon sell-side firms to be compliant, but with the compliance onus now falling on the financial advisor or investment management teams regulatory process changes are imminent.

Also, more and more companies are adopting Enterprise Agile practices where time to market is key rather than being perfect. The best way for the regulatory teams to adapt to this change is to receive the changes in the backlog list of the IT teams as they come, so that teams can prioritize and implement regulatory requirements. Today all regulatory changes are seen as large projects with huge overheads and risks associated. But evolutionary changes are at play, and we believe this has to change.

How can buy-side firms be more effective?

The only way to be ready in such an environment is to play a more proactive role. This proactiveness is both in the arena of rulemaking and the implementation process.

This can be broken down into four segments where companies can improve by staying ahead of the curve:

• Proactiveness in Rulemaking--Acknowledge the changes in regulations and work with the Federal and State regulations to both understand the changes and then provide suggestions for effective internal implementation.
• Thoroughness in Identifying Impacts-- Once the team understands the upcoming regulations, they need to see which area of their business is impacted and then let the impacted teams know of the changes coming in. Artificial Intelligence can be leveraged todissect the information from the flurry of Notices and Updates coming from the regulation changes and generate actionable insights which can then be forwarded to the appropriate team.
• Firm wide Analysis for Implementing Impacts--Communication to the teams across the organization is the key to the success of applications for Regulatory Controls. This includes training the field associates for process changes, fiduciary responsibility and more. This also includes applications teams being made aware of the regulatory changes so that system changes can be applied.
• Implementing New Digital Regulatory Tools – The areas where most of the innovation is happening within the buy-side is Customer Understanding, Sentiment Analysis and Referrals. The regulatory and compliance aspects across these areas are now being embedded in the process flow within the systems rather than having them as a separate piece of ownership.

Having said that, there exist significant gaps in how to detect upcoming regulatory changes early and be ready with the implementation pipeline to address them effectively and efficiently to each and every one.

By Vinayak Bhat, Director-Technology, Synechron, Charlotte, NC, USA