Given an increasingly complex regulatory environment, the rush to embrace digitization, and significant fluctuations in the economic climate, the ability of financial institutions in the Middle East to comply with regulations, manage risk, and compete varies significantly.
Many factors play a role in a financial institution’s ability to keep pace with the changing regulatory environment, including the size of the bank, the complexity of its operations, and exposure to international markets. Larger institutions subject to oversight by active regulators tend to be more proactive. At the same time, smaller banks lag in their ability to understand and implement changes to their operations to ensure regulatory compliance.
Nonetheless, changes to the regulatory and operating environment will continue, regardless of how prepared a financial institution is to adapt and comply. “There is a technology element which can make it really complicated if you’re transitioning and you have all those exposures on your book. The need to be able to transition smoothly requires a strong element of technology,” says Jaffar Hussain, Global Head of Liquidity and Market Risk at the National Bank of Bahrain. “As a bank, we are operating in a risk environment and we want to make sure that we have the right tools to measure the risk we want to take on the balance sheet and that may be that we adopt a lot of this tech early on because it is what is right for the bank today,” notes Jaffar.
What to do while waiting for regulatory guidance
The LIBOR transition, treasury digitization, and the delayed launch of the Basel III regime and its market risk component, FRTB, continue to raise compliance expectations forcing banks to evolve.
Yet, as history shows, regulations take time to materialize. As central banks in the Middle East review, interpret and create the future regulatory regime, financial institutions can prepare when regulations are still underdevelopment or delayed by staying in constant touch with regulators and learning from subject market experts on how they see the compliance landscape shifting.
Nauman Ali Khan, Executive Vice President and Head of Enterprise Risk Management for Mashreq Bank, advises caution when evaluating compliance within the entire sector. “I don’t think it would be fair to talk about the industry and all the banks within that as a whole.” From his perspective, Nauman believes a bank’s state of readiness requires a more nuanced view. “By in large two factors have driven readiness at banks across the region; one the size and complexity of their operations, their exposure to LIBOR and the universe transactions of their clients that have been impacted. And the second, is how active the regulatory authorities have been in instigating the conversations and pushing the banks to have a plan and execute those plans,”
With that said, there’s an opportunity to adopt a proactive approach. For example, some banks may adopt certain aspects of a pending regulation as it makes sense to do so from a risk management perspective. In those cases, once regulators finalize a rule or regulation, early adopters may have minimal changes, if any, to achieve compliance.
Overcoming regulatory challenges with technology
Technology is critical to managing risk, especially in global institutions subject to complex and evolving compliance regimes. A solution should be able to cope with current regulations and adapt to meet future regulations. The solution provider should also possess in-depth compliance knowledge and the means to deploy updates quickly and efficiently.
“To create a compelling business case to justify the investment in technology, financial institutions should consider the broad range of benefits a solution can provide,” says Giuseppe Netti, Head of Financial Products, Middle East and Africa for Bloomberg. “This includes the ability to adapt and comply efficiently with the latest regulations, the solution’s ease of integration and usability, as well as the ability to streamline operations,” adds Netti.
When it comes to compliance and treasury technology, cloud-based solutions can help financial institutions gather and centralize disparate data from across the institution. A cloud-based solution’s availability, security, and scalability allow financial institutions to quickly embed regulatory changes and gather relevant metrics. A cloud-based solution can also reduce compliance costs compared to on-premises technology.
The benefits of preparation
While institutions in the Middle East always comply with financial regulations, they tend to adapt slowly and sometimes find themselves out of compliance due to a delayed response. A proactive approach to compliance, which can include early adoption of certain rules and regulations, creates time to remove internal siloes and align the efforts of stakeholders to facilitate compliance, manage risk, and pursue the digital transformation of the treasury department needed to compete.
In short, to avoid falling short of regulatory expectations, every financial institution must prepare for tomorrow’s compliance environment today.