ArVision Quarterly Newsletter: 11 Actionable Ways to Prepare for Regulatory Change

Regulatory pressures in finance are mounting — and show no signs of easing as regulators ramp up rule-making for the coming year.¹ At the same time, industry groups have formed broad coalitions and lodged multiple legal challenges to fortify their resistance, leaving the industry uncertain about what to actually prepare for.

How can firms effectively plan ahead?

In the mid to long term, most firms will need to retool operations and onboard new technology systems, ensuring they have agile RegTech that nimbly responds to change. But the short term is also due consideration.

From building robust networks and to strengthening data management to investing in the high-yield activity of lobbying, a number of tactical steps can help firms not just comply with but anticipate — and maybe even shape — the changes that will transform their business environment.

11 ways to prepare for regulatory change

1. Prioritize continuous education

Deloitte observes that “regulators are swiftly drafting and implementing regulatory changes,” and KPMG echoes, “The financial services industry is experiencing a level of regulatory intensity rarely seen before.”^2,3 Staying current can ensure your firm maximizes prep time. Sign team members up for a workshop or seminar focused on regulatory updates.

2. Build a robust network internally and externally

Maintaining strong relationships between internal teams and with external partners can help you navigate regulatory change. In a recent brief, EY underscored the importance of proactively engaging with regulators to manage systemic risks.⁴ These relationships facilitate knowledge sharing and promote an organizational culture of networking in all areas of your organization. Encourage collaboration among your front, middle, and back offices, as well.

When launching a new fund, for instance, involving portfolio managers, risk management teams, and operational leaders from the outset can foster a serendipitous flow of information. Your middle office might glean front-line insights from the custodian that traders aren’t familiar with, like details on new jurisdictional regulations, tax treatments, or reporting obligations.

3. Automate reporting

The largest global banks spend nearly $1 billion annually just on regulatory reporting and compliance, according to a McKinsey study.⁵ Automation can accelerate the rate at which organizations adjust to new reporting requirements and reduce costs. Leverage technology solutions that automatically generate reports to save time fulfilling regulatory requirements like transaction reporting mandates under MiFID II. By automating data collection, validation, and reporting, good RegTech software will streamline your compliance.

4. Perform gap analyses

Running a gap analysis will allow you to identify vulnerabilities. As part of a rigorous analysis, map existing regulations against current policies; ensure compliance and legal teams review internal procedures; interview employees to confirm policies are easy to follow; and flag gaps in technological infrastructure, like inadequate reporting tools, that hinder compliance.

For extra credit, run a simulation of a regulatory inspection to ensure your organization is ready for any scenario: Stage a mock SEC visit where “they” demand specific financial statements, employee communications, and trading records.

5. Prioritize a single source of truth

While departments may interact with data in different ways, the entire organization needs visibility into the same, accurate information. Most CFOs agree, with nearly seven out of 10 saying that a single source of truth is a critical component of a successful enterprise.⁶ If a trade is amended on a client account, this information must propagate firm-wide to prevent errors.

Integration tools should allow disparate sources to flow seamlessly into a central source without manual intervention, with data validation and reconciliation automated and discrepancies flagged for resolution. To achieve this, implement a centralized data warehouse to act as a single storage location from which data is managed and accessed; and articulate a data governance policy.

6. Engage a lobbyist

Today, as regulatory activity surges, big bank lobbying reaches its highest levels since the 2008 crisis.⁷ And FinTech has already set new records in lobbying spend the first two quarters of 2024.⁸ Research has shown that lobbying returns $220 in tax benefits to companies for every dollar spent. With ROI like this, it may be time to invest.⁸

7. Strengthen data governance

Maintaining a strong framework of policies, processes, and standards for data management helps safeguard information integrity across your organization. Use a tool that consolidates compliance, regulatory, and reporting tools within a single system, like a unified interface. This protocol can simplify regulatory prep and promote data consistency by integrating and streamlining data flows both within an organization, and between an organization’s external partners. As a bonus, a unified interface allows for a full audit trail, tracking even the most granular activity.

8. Hire an ex-regulator

Hiring a compliance officer with experience at a regulatory body like the SEC can prove invaluable for a US-based asset manager. They can offer unique insights into the agency’s inner workings and priorities. Hiring internally beyond traditional financial roles, such as recruiting individuals with cybersecurity or data analytics backgrounds, can also bring value. A team with diverse skills is better equipped to respond to regulatory shifts.

10. Perform a self-audit

An internal audit, by your own team or an external auditor, can pre-emptively reveal compliance issues. Internal auditors will work with senior management to perform their assessments. Some firms may hire a third-party specializing in regulatory compliance, like Big Four accounting firms. Some organizations prefer an external assessment as the results may be deemed more impartial, ensuring the organization is “maintaining a strategic distance from potential lawful liabilities.”¹⁰

11. Join an industry group

Industry groups can provide timely information on relevant regulations. They also facilitate powerful alliances that influence regulatory bodies through collective action, as we saw this summer when the National Association of Private Fund Managers challenged the SEC, leading the Fifth Circuit Court to vacate the agency’s PFA rules.¹¹

Industry groups also offer insights into peer firms’ guidelines, reducing compliance costs. It’s helpful to think of industry groups as “noncompetitive,” one AML executive tells Corporate Compliance Insights. Pursue “compliance as a community” to leverage “collective regulatory know-how, expertise, and organizational resources.”¹²

10. Partner with a tech provider

An experienced technology provider can deliver dynamic solutions that it would be cost-prohibitive to build in-house. The latest tech should keep up with rule changes, scale with your firm’s growth, and free up your internal resources to do what they do best: manage assets.

A good tech partner will be able to manage large pools of data, respond in near real-time to shifting regulatory requirements, automate processes, and streamline reporting. A great partner will do you one better — they’ll provide continuous support and even bring their own regulatory experts to the table, giving you access to a top-flight compliance team without the need to hire and train.

As the industry braces for a new wave of regulations, a competitive differentiator will be a firm’s ability to anticipate and influence regulatory trends rather than react to them. Agility and foresight will be more valuable than size or tradition, opening doors for innovative players to influence industry outcomes. By fostering a culture of continuous learning and adaptation, investing in flexible, future-proof systems, and maneuvering for a seat at the federal negotiating table, you can position your firm to thrive in this landscape marked by rapid flux.

Interested in learning how Arcesium can help you prepare for shifting regulations? Learn how our Opterra Operational Platform can support your needs or reach out to us with any questions.