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Don Russo, VP, Financial Services, Oracle Corp.
Don Russo, VP, Financial Services, Oracle Corp.
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Regulatory Compliance: Do or Die? Or Do and Thrive?

Since compliance with new regulations is not optional, banks should consider it an opportunity to gain competitive advantage.

Banks are scrambling to comply with a host of new laws resulting from dubious investment-banking practices, recent accounting scandals and tightened security needs.

At first glance, banks may perceive the added responsibility of updating internal systems and adding controls as a pain point. A proactive approach to regulatory requirements, however, can turn compliance into a leverage point to improve their business and gain a competitive advantage.

There are several regulatory acts to which the financial services industry must comply. The USA PATRIOT Act mandates financial institutions verify the identity of their customers and imposes tougher scrutiny on bank customers in the wake of the 9/11 terrorist attacks. By April 2004, the Sarbanes Oxley Act will institute accounting reform and investor protection changes at banks. However, the legislation with the greatest implication to the banking industry is the Basel II Accord. Provisions set tighter operational regulations aimed at controlling the minimum capital adequacy required of banks to cover their financial exposure. Though it will not be in effect until 2006, firms must have two years worth of recorded history, so they need to start capturing the data by the end of 2003. Overseas markets already are revamping their risk practices for compliance.

A constant in this new environment is that regulators are demanding timely adherence to legislation and will penalize banks for noncompliance. Earlier this year, five major financial services firms were fined $1.65 million each and told to review their internal record-keeping procedures for failing to preserve internal e-mail communications in accordance with SEC Rule 17a-4 and NASD rules 3010 and 3110. Those rules require firms to supervise and record all electronic communications related to their business.

While fines and legal fees have an immediate impact on a company's bottom line, the long-term costs of noncompliance can be devastating. A legal infraction could tarnish a company's reputation, causing irreparable harm to its brand and corporate officers. In an industry where trust is everything, banks cannot afford to lose the confidence of their customers.

Financial institutions are taking the necessary steps to implement compliance solutions. Tower Group predicts that brokerage firms will spend $400 million in 2003 on compliance with the PATRIOT Act. Analyst group AMR projects that all companies, including banks, will spend up to $2.5 billion for Sarbanes Oxley compliance in 2003. Even if financial institutions do commit resources to mitigate the regulatory compliance, the type of solutions they purchase can have a major impact on their organizations.


In every area of compliance, banks will need to review transactional activities, extract data and perform analysis. In shopping for compliance solutions, banks will require tools that add control to reporting processes and perform real-time analysis against transactional systems. Since all major financial institutions have transaction systems in place, the tendency is to tack on piecemeal solutions. This approach responds directly to legislation and relieves the bank from threat of penalty, but neglects a greater opportunity to capitalize on data revealed by compliance systems.

Instead of buying separate systems, banks should purchase an integrated transactional, analytical and control system to gain an overall view of their organization. Under Sarbanes-Oxley, for example, if treated holistically, with one series of interconnected files, banks can meet compliance requirements and concurrently streamline processes and centralize information. With improved visibility and quick access to financial data across the firm, banks can make better decisions about customers and programs.

Regulatory compliance will yield the greatest opportunity for banks in improved risk/capital management. Basel II requires banks to maintain a certain amount of capital reserves. If banks don't manage carefully, they could hold more capital on hand than is required and reduce their book of business. By adopting integrated solutions, they gain more efficiency and stability in managing capital.

The next year will be pivotal. As banks try to gain a competitive edge, treating compliance correctly may help them prosper.

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