A cross industry survey released last month from SunGard presents results on how the pace of regulatory change in financial markets is affecting market participants. We found this to be a good overview piece with lessons not only for the markets in general but for securities finance in particular. The punchline: firms that get ahead of the regulatory curve are already showing up as market winners.
While the report overall is worth a read, a few sections were notable in their survey results. In the Coping Strategies section, almost 65% of respondents said that they were first responding to regulatory change by investing in technology. Another 63% said they were increasing the size of their leadership team. The average budget increase was 12% overall for regulatory matters. Throwing money at a problem is a well tried solution in financial markets among other places. The question here is how smart is the money being used; that was outside the scope of the report but is really at the heart of the matter.
One conclusion of this section is that High Performers in the regulatory space will outpace their peers. According to the report, 36% of respondents said that their firms now have a regulatory team in place to address coming changes. We believe this strategy is a winner; we see regulatory changes that are creating real opportunities as much as difficulties in older business models. A strategic team that is keeping a close eye on how changes can impact businesses both for the positive and negative creates a more likely positive outcome overall. Not surprisingly, Finadium has a good number of clients who are members of these strategic teams.
The report found a positive correlation between firms that had “established a single, clear point of leadership on identifying and responding to the varying factors in regulatory change” and financial returns. In other words, responding proactively to regulatory change = greater returns.
Another conclusion that resonated with us is the incredible importance, and difficulty, of cultural change. According to the report:
“Many companies do not yet feel that they are in a high state of readiness when it comes to cultural change. In one sense, that is to be expected, for changing the culture of an organization is bound to take longer to accomplish than the implementation of a new procedure or process (where readiness levels in this survey are higher). In fact, it may be at least a generation before the culture is transformed at many organizations. For the most troubled institutions, the process of renewal may not be completed until a completely new set of people holds senior management positions in the organization.
“However, businesses know they must confront this challenge, which goes to the core of the reforms that regulators around the world are making.”
We’ve identified this cultural issue as a big one in securities finance as well. Finadium subscribers can check out “Building a Culture of Collateral Management at US Asset Managers,” published in June 2012.
We find this SunGard report to be a helpful contribution in arguing why preparedness in financial regulation leads to success and recommend a read-through. The full report can be found here (free registration required).