Banks are spending money – and lots of it – to build out a strong front office controls function. 1LoD asked industry insiders where exactly this investment is going.
There are many aspects of the maturing front office controls function that are as yet opaque and undecided. Yet there is one that is absolutely crystal clear and unambiguous: It is costly for banks; very, very costly indeed.
But banks don’t have much alternative to paying it. This is simply the cost of doing business in financial services in the second decade of the 21st century. As Todd Sullivan, Morgan Stanley head of risk management for fixed income Americas, in New York, says: “Would you care if the cost of oxygen went up? Yes, but you don’t have much choice about paying it.”
Still, financial resources are finite, and banks must prioritise, however difficult that task may be. When asked what areas would receive most investment at their organisations over the next 24 months, respondents to the 1LoD survey indicated that the three areas likely to lead are: regulatory-related control mediation work, e-communications surveillance and trade surveillance.
A little under 40% suggested the regulatory-related remediation work and e-communication surveillance would receive ‘significant investment’ in the next two years, while 34% said trade surveillance would receive ‘significant investment’.
Over 60% also said that regulatory related remediation work would attract ‘some investment’ and no one said that no investment in this area is planned over the next two years.
These findings are borne out by conversations with those in the industry. The regulators are still setting the agenda. While the heat might have been turned down a little in the US, in Europe regulators are still extremely zealous and unrelenting in their efforts to bring the industry to heel.
Banks have to get their ducks in a row. Moreover, there are those institutions – and this is a relatively high number – that are currently caught in enforcement orders and have to put controls in place to satisfy displeased regulators.
A London senior controls officer says: “Regulation is an important driver in investment, probably the main driver. Everything that is done seems to be done in reaction to breaches of the previous regulation and people have to fill the gaps, or it is in reaction to new regulation like MiFID.”
Watchful eye on e-communications and trade
Right after regulatory compliance for likely spending is e-communications surveillance, according to the 1LoD survey. The difference here is that 5% said no investment was planned and 55% said it would receive ‘some investment’.
Trade surveillance lags a little behind, with over 50% saying it will receive some investment and some 15% saying no investment is planned. Better surveillance tools remain a number one priority of the industry and a lot of communications surveillance is still very labour intensive. Even when machines supply alerts, the investigation of these alerts will be manual.
The implication that e-communications surveillance will receive a bigger slice of the pie than trade surveillance is perhaps explained by the fact that breaches in conduct are more clearly revealed in communication than trading patterns.
But surveillance technology, which is undergoing a generational shift in what it can reveal and how it can aid better control in the front office, is at the forefront of what banks will
be spending money on. The initial outlay is, of course, prodigious, but such systems hold the promise that, in time, they will enable headcount to be reduced.
“The firm is making a significant commitment to surveillance, which is principally directed at the markets business,” says HSBC chief control officer Rupert Jolley, in London. “This isn’t just about meeting the needs of regulators but because it’s a good way to do business. What we’re doing is consistent with the rest of the industry, and it’s expensive but I expect the investment pipeline to continue for many years.”
In the next 24 months what level of investment will your organisation make in the following areas?
“Would you care if the cost of oxygen went up? Yes, but you don’t have much choice about paying it.”
Todd Sullivan, Morgan Stanley
Areas of further scrutiny
But there is more to surveillance than trade and e-communications surveillance. Next on the list is voice surveillance, with 14% of correspondents saying that this area will receive ‘significant investment’ over the next two years, 48% expecting ‘some investment’ and 38% anticipating it will attract ‘no investment’ at their firms. Of the various types of surveillance, this appeared to have the lowest profile.
Of course, the dream package of surveillance technology remains the entirely holistic product: the one black box that can do everything and anything. Some 14% said that holistic solutions will receive ‘significant investment’, while a substantial 68% said it will receive ‘some investment’ – testament, perhaps, to the extent to which banks want something like this but also to how far from execution it remains. Some 18% said it will receive no investment at their firms.
A tidal wave of data
Meanwhile, workflow automation tools for supervisors will receive ‘significant investment’ in the next 24 months, according to 18% of correspondents while over 60% said it will get ‘some investment’ and 15% said ‘no investment’ at all. Management information tools have a higher chance of receiving ‘significant investment’, it seems, with 24% of replies saying this will occur.
A little under 60% said management tools will get ‘some investment’ and almost 20% said ‘no investment’. Both workflow automation tools and management information tools represent an effort by banks to get on top of the vast amount of data they are now churning out. Most chief executives of banks say, only a little in jest, that they now run technology companies that do financial services.
But supervisors are drowning under this sea of data, alerts and red flags. There has to be an effort to manage this data better, to streamline it and organise it for speedier and more meaningful consumption. This is one of the biggest issues facing banking today, something all in the front office control function wrestle with, and
it is not surprising that a majority of those in the 1st line of defence think these areas will receive at least some investment in the next year or two.
“The firm is making a significant commitment to surveillance. This isn’t just about meeting the needs of regulators but because it’s a good way to do business.”
Rupert Jolley, HSBC
Designing the perfect dashboard
Next on the list, and in terms of likely spend ranking only just below workflow automation tools for supervisors, stand supervisory dashboards. Almost 20% of correspondents think these instruments will attract ‘significant investment’ and 64% said there will be ‘some investment’ in this area.
Most supervisors at tier one banks now have supervisory dashboards to which alerts are uploaded. But there are significant differences between the technologies employed by the big banks, and few seem to have hit on the optimum solution.
“There are a lot of differences in the types of dashboards banks use,” says Scott Levine, a director at PwC in New York in the financial services digital capital markets consulting unit. “Some have automated generated alerts, some do it manually. Some dashboards act as a system and data aggregator while others have rules engines built in. Everyone is in a different spot along the maturity curve.”
Only 5% of correspondents think that the staff headcount, both onshore and offshore, will receive ‘significant investment’ Around 50% think the staff head count onshore will receive ‘some investment’, with a little less, around 47%, saying offshore head count will receive ‘some investment’.
Just over a third, at 38%, said the offshore head count will get ‘no investment’ and 34% say the onshore head count will receive no spending. This data seems to suggest that most people agree that the days of great burst of voluminous staffing in front office controls are over. Recruitment is likely to continue, but not at the helter-skelter pace of the last few years.
The majority of senior control officers agree, however, that recruitment of the right personnel remains a significant objective and, notwithstanding the central role technology is expected to have in the next few years, there is no substitute for good people. The recruitment of these people is never easy.
According to Simon Tuke-Hastings, partner, head of risk, analytics and regulation at Hammond Partners, the London recruitment firm, it is vital for the front office controls function to recruit people from a sales and trading background if they are to command the respect of the front office. But it is not easy to persuade people to leave the excitement and hurly-burly of trading for the somewhat more arid territory of risk.
Even those who are tempted to leave sales and trading for a front office control function, perhaps because there’s a reduction in force on the trading floor, might only do so as a temporary measure and will look for a return to trading as soon as possible. This is not conducive to stability for the function.
The answers, in this as in other areas of investment in front office controls, are not easy to find.