Challenges

Typical Challenges in the Finance Industry

Financial markets firms seek to go for offshore operations and extend their global footprint in order to compensate for diminishing margins. They move processes online (e.g., online advice, real-time inventory) and therefore try to increase efficiency and minimize fixed costs.

Regulatory uncertainty is threatening to drive up compliance costs and distract firms from focusing on revenue generation. In the U.S., pending regulation NMS and soft dollars are creating a need for increased automation and transparency, while Basel II and European integration are driving enterprise-wide infrastructure transformations in Europe.

Several financial standards impose security requirements on financial institutions. On January 17, 2001, the banking regulatory agencies adopted guidelines implementing Section 501 of the Gramm-Leach-Bliley Act (GLBA). The guidelines require financial institutions to establish a comprehensive and coordinated information security program, appropriate to the size of the bank and the complexity of its operations.

These guidelines require financial institutions to establish an information security program to:

Identify and assess the risks that may threaten customer information
Develop a written plan containing policies and procedures to manage and control these risks
Implement and test the plan
Adjust the plan on a continuing basis to account for changes in technology, the sensitivity of customer information and internal or external threats to information security

NASD Rule 3510, 3520 and NYSE Rule 446 require members to create business continuity plans that are reasonably designed to enable members to meet their existing obligations to their customers in the event of a significant business disruption. These obligations include granting customers access to their funds and securities during such an event. NASD and NYSE members also must address their existing relationships with other broker/dealers and counter-parties.

The Sarbanes-Oxley Act requires that appropriate internal controls be in place to contain and detect fraud (section 404). And it requires a company CFO and CEO to sign off on those controls as part of the periodic reporting process (Section 302).

In October 2001, the Basel Committee on Banking Supervision (BCBS) issued customer due diligence for banks, subsequently reinforced by a General Guide to account for opening and customer identification (CDD) in February 2003. The CDD paper outlines four essential elements necessary for a sound know-your-customer (KYC) programme. These elements are:

Customer acceptance policy
Customer identification
Ongoing monitoring of higher risk accounts
Risk management

Similar to the approach to consolidated credit, market and operational risk, effective control of consolidated KYC risk requires banks to coordinate their risk management activities on a groupwide basis across the head office and all branches and subsidiaries.