By Daniel Carpenter, Head of Regulation at Meritsoft a Cognizant company.
The new post-Brexit reality for UK-based banks is certainly a challenging one, as the market structure landscape is still very far from settled ahead of upcoming equivalence talks. Whatever level of equivalence is agreed upon will set the tone for things to come, but is the prospect of sweeping deregulation and change a workable one?
Some financial participants see this as an opening to deregulate markets and diverge from EU directives. Recently, the Chancellor of the Exchequer spoke about the opportunity for Britain’s financial sector to undertake a ‘Big Bang 2.0’ and has welcomed the Lord Hill review into listing rules and the role of special-purpose acquisition companies (Spacs). However, the famous phrase used to describe the de-regulation and technological innovation of the 1980s that cemented the City as a global capital of finance doesn’t really apply in the same way.
In reality, it’s highly unlikely we will see sweeping de-regulation to a comparable extent. Britain has always led the way in terms of compliance and with potential new and different regulations for the UK, the EU and the global capital markets it’s possible that there will be just as many, if not more, regulations to adhere to than before.
So, if we are to see a ‘Big Bang 2.0’, what should this look like? Back in 1986 sweeping changes were made, perhaps none more transformative than the switch from open outcry to electronic, screen-based trading. With this came new capabilities for the front office as electronic processes led to greater automation. In 2021, the potential for more regulation will bring with it new operational challenges. However, it is in the back office where automation and technology innovation are crucially needed in order to address some of these challenges.
Cloud technology, for example, can help reduce the total cost of ownership for new services and artificial intelligence (AI) can turbo-boost back office processing. Once core data and solutions are centralised and accessible, AI can be layered over the top of the data to predict the activity and performance of post-trade functions and fuel better decision making. For example, in the area of settlement fails, counterparties’ historical settlement performance can be analysed, and AI used to predict the likelihood of future fails, the cost of associated buy-ins and opportunities for stock lending. With the settlement discipline regime (SDR) of CSDR soon to be introduced for trading and settlement of EU-based securities, UK-based banks trading and settling in the continent will need to be compliant for their trading in EU securities. In this instance, technological progress can smoothen out what is considered a laborious process.
Trade settlement fails is not the only area that greater technology innovation can solve. Banks are currently paying significant costs for the processing and payment of brokerage fees as well as transaction taxes. It is therefore no surprise that the issue of post-trade innovation is also an important issue at the Bank of England, which currently has a plate full of important issues to worry about. The report released in June 2020 from the Post-Trade Technology Market Practitioner Panel concluded that there is significant scope for improvements in efficiency and resilience in post-trade processes. From KYC, collateral management to standardisation of non-economic trade data, much can be done to make this part of the workflow more efficient.
While Spacs will take the headlines, this must be seen as a great opportunity to invest in the back office to address the stubborn inefficiencies that remain in post-trade activities, which currently undermine overall performance at banks. There are new technology tools that should be considered, with cloud and AI enabling automation of the capture and processing of trade data. Banks should embrace ‘Big Bang 2.0’ as a chance to improve their overall customer experience by adding value in areas that have been targeted in the past for ruthless cost cutting. Operational efficiencies through automation will open new areas of value for their customers and save time for more person-to-person interactions where it makes sense, in effect moving the “back office” to the front lines.
If the industry can channel the technological innovation available today, including cloud-hosted systems and artificial intelligence technology for analytics, coupled with the energy it applied 35 years ago, the back office can become a significant contributor to companies’ top line growth and performance at a time when business is challenged on so many fronts.
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