Reaching the Intersection of Regulation and Automation

How technology can support sell-side firms in the new regulatory era.

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In this article sponsored by FIS, Craig Costigan, division executive for sell-side risk and compliance at FIS, explains how to use automation to comply and compete in changing global financial markets.

Financial firms have faced great regulatory change in the decade since the financial crisis. As the implementation of these new rules continues apace, sell-side organizations must integrate new compliance systems and procedures into their operational activities. For many, automation has come to the fore as the best way to consolidate compliance infrastructure in the most efficient and effective way—particularly as firms face the need to cut costs while remaining competitive and responsive to clients. By automating data collection, processing and reporting, it is possible to comply with new rules and reduce costs simultaneously. Furthermore, organisations are also starting to discover that automation can deliver so much more than regulatory box ticking—it can help sell-side firms to become more agile and competitive.

Increased automation will impact sell-side businesses, according to 84 percent of 464 sell-side executives surveyed globally by FIS in 2016. And, as 87 percent of these respondents acknowledge that their company is becoming more technology-driven, great change is definitely in store for the front-, middle- and back-office functions of such companies. However, while automation is set to have a major impact within sell-side organisations, it will have a very different role to play in each business area, according to respondents.

In the front office, the increased use of electronic trading has already had a significant impact on many firms, and 27 percent of respondents believe it will continue to do so over the next two years. However, market data is likely to see the most change going forward, according to 45 percent of survey respondents, as organisations are able to access more accurate, high-quality data from a wider range of sources.

The middle office is least likely to be associated with technological change, and the survey results seem to support this view to a certain extent. When asked to name the business area that has most effectively adopted technology to date, risk garnered only 7 percent of responses followed by 5 percent for compliance. However, such attitudes may be set to change since respondents predict that, over the next two years, risk management (45 percent) and compliance (34 percent) are the middle-office functions most likely to be impacted by technology. Collateral management activities rank a distant third with 19 percent. 

Craig Costigan, FIS
Craig Costigan, FIS

On the other hand, the back-office use case for technology tends to be very clear. Repetitive, data-reliant reconciliation activities that are prone to human error are often seen as the most amenable to automation. Over the next two years, market participants expect post-trade processes (37 percent), corporate actions (34 percent) and reconciliations (25 percent) to be the back-office areas that will be most heavily impacted by technological innovation, according to the survey results.

While each function will be uniquely affected by the increased use of automation, it can also provide a solid, enterprise-wide foundation for sell-side firms that want to create a consolidated approach to changing market conditions. Automation enables organisations to collect, collate and manage data that can be fed into systems throughout the business at great speed. By reducing the need for manual data entry—and therefore the chance that human error can corrupt this data-—increased automation also allows firms to gain access to better-quality information and analysis. And as technology continues to improve and sell-side solutions become more innovative, users will see the benefits grow in relation not only to the efficiency and effectiveness of compliance solutions, but also to the firm’s overall offering. 

However, while sell-side organisations should take full advantage of such benefits, the survey shows that nearly four out of every 10 respondents have failed to update their technology offering over the past two years. Why are these sell-side firms reluctant to take the step towards greater automation? Some firms are almost certainly ‘kicking the can’ further down the road due to budgetary pressures and belt-tightening efforts, but others may be concerned about the negative impact on headcount. It is important to note, however, that while technology can certainly enhance activities across the front, middle and back office, it will not necessarily replace employees within these functions. More than half (57 percent) of the survey respondents agree that the real benefit of technology lies in its power to augment human analysis rather than replace people. Particularly in areas such as data collection, increased automation could free up personnel for more skilled tasks, such as those relating to analysis. On a more general level, automation can be used to consolidate systems on an enterprise-wide basis to augment the growing number of compliance activities that must be conducted across the front-, middle- and back-office functions.

The global financial markets are turning to a new chapter in the regulatory environment, one in which automation can help to cut costs and create new opportunities for sell-side organisations. The impact of automation will be seen across the front, middle and back office to varying degrees. However, those firms that remain open to increasing the use of automation right across their business infrastructure will be able to build a more responsive offering that is both compliant and competitive. As sell-side firms develop new systems and processes to ensure compliance with the recent deluge of financial rules and regulations, the development of a consolidated approach to compliance that is supported by quality data and a robust governance infrastructure is crucial. Automation is key to supporting sell-side firms in this endeavour. Those organisations that remain brave, agile and technology-focused will face this new chapter as confident competitors.

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