CIB Regulatory Change Management:

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1 CIB Regulatory Change Management: Challenges, Framework and Approach Summary Executive Summary Complex Regulatory Landscape Balancing Regulatory Costs and Risks Key Challenges: Regulatory Cost Transparency and Governance Sia Partners Regulatory Change Management (RCM) Framework and Approach Contacts and Disclaimer Conduct costs from fines and lawsuits at 10 of the world's largest banks totalled around $ billion between 2009 and A global bank recently added 1,750+ regulatory and financial-crime compliance employees in 2013, an increase of more than 50% since its $1.9 billion money laundering settlement in Its operating expenses rose by 4% in the first half of 2014, in part reflecting increased investment in risk, compliance and global standards. Banks who have invested in implementing a robust regulatory change management framework have been able to cut their regulatory change budget by 24%, minimise failure to complrisks and reduce overspending on non regulatory programmes wrongly allocated to the regulatory agenda. This article provides more insight into (i) what are the current challenges faced by banks in regards to increasingly complex regulatory changes (ii) how banks can become better organised to holistically monitor, define and implement regulatory programmes.

2 CIB Regulatory Change Management (RCM) Challenges, Framework and Approach I. Executive Summary Banks have always faced regulatory-driven change. What sets the current environment apart is the sheer volume of significant new regulation being introduced. Those regulations require banks to fundamentally address the way they do business and therefore drive a significant part of their annual change budgets. Conduct costs from fines and lawsuits at 10 of the world's largest banks totalled around $ billion between 2009 and A global bank recently added 1,750+ regulatory and financial-crime compliance employees in 2013, an increase of more than 50% since its $1.9 billion money laundering settlement in 2012.Its operating expenses rose by 4% in the first half of 2014, in part reflecting increased investment in risk, compliance and global standards. Banks who have invested in implementing a robust regulatory change management framework have been able to cut by 24% their regulatory change budget, minimise failure to comply risks and reduce overspending on non regulatory programmes wrongly allocated to the regulatory agenda. The Sia Partner s Regulatory Change Management framework (RCM) can help Banks manage their incremental regulatory costs of doing business more effectively and efficiently. This article provides more insight into (i) what are the current challenges faced by banks in regards to increasingly complex regulatory changes (ii) how banks can become better organized to holistically monitor, define and implement regulatory programs. II. Complex Regulatory Landscape The post financial crisis era has seen an increasing number of regulations, both at the global and regional levels. Consequently it is imperative for banks to monitor external regulatory changes for each country supervision framework under which it operate. The below pictures are samples of how global and regional regulations can be mapped against regulatory themes, timelines and critical milestones. Banks who have a clear understanding of ongoing and upcoming rules implementations can set up a fully supportive governance structure to tackle the associated front to back process, people and system changes.

3 a) Illustrative Global Regulations Landscape: b) Illustrative Regional Regulations Landscape: III. Balancing Regulatory Costs and Risks Recent regulatory breaches and hefty fines observed in the capital markets demonstrate a need for banks to better manage their regulatory change impact. In effect the opportunity cost of failing to comply is to plan and coordinate upfront regulatory change-and-run programmes. Regulatory costs can be broken down into 3 categories: Cost of failing to comply

4 Costs of becoming compliant when a new regulation is implemented Costs of remaining compliant during the normal course of business activity a) The incremental cost of a regulation can be defined as the savings that would be realised if the rule was removed. This cost can be broken down into regulatory costs incurred in the normal course of business to remain compliant (AML/KYC, trade reporting, regulatory fees, record keeping, OTC Clearing and margining etc..) and one-off costs tied to the implementation of new regulations (regulatory change programme costs). b) Regulatory breach is the result of banks negligence to comply with new and ongoing regulations i.e. inadequate controls, internal process breakdown, system failure, inappropriate human conduct and behaviour, lack of training, misunderstanding of rules requirements etc. Occurrence of such risk is usually heavily punished by regulators through fines and public embarrassment, which eventually translate into reputational damage and loss of business. IV. Key Challenges: Regulatory Cost Transparency and Programme Governance Similarities and overlaps between regulations create intricate relationships between regulatory projects, which if not managed as part of the bank overall strategy can lead to costly and inefficient duplicated controls, process and project structure. Typical observations at global and regional banks relate to (i) poor governance structure and (ii) lack of regulatory cost transparency: a) Silo-based Regulatory Program Governance:

5 Each regulation is tackled in isolation without an understanding of inter dependencies, synergies opportunities, resource constraints and overall strategic direction The average project overrun is 24% of budget and schedule of banks Draft regulations are open to interpretation and they evolve in parallel to programme execution Change activity is often duplicated as similar requirements necessitate changes to the same processes and systems Demand for subject-matter expert (SME) knowledge in specific areas (e.g. risk control and financial modeling) can often far exceed supply and result in schedule delays Technology constraints, impacting the project portfolio, are not well understood or actively managed b) Poor Regulatory Cost Transparency: Due to silo based regulatory projects management, banks do not have a comprehensive view of how much they spend per year on regulatory programmes. Also banks typically claim they do not have resources to implement a robust allocation methodology to tie back the GL to associated cost drivers. Banks most often do not set a baseline budget for implementing regulatory programmes as those already qualify as being mandatory and being prioritised as such. It becomes very difficult for a business manager to challenge the high cost of regulation based project types which have potentially been incorrectly classified (mandatory vs tactical vs strategic) Lack of federated governance structure to manage regulatory projects leads to duplicated effort to implement similar requirements across multiple regulations

6 Often there are no established formal processes and policies in place to regularly review variance between baseline and actual regulatory costs and take corrective actions V. Sia Partners RCM Framework and Approach Sia Partners RCM Framework objectives can be summarised below: Identify and monitor regulatory landscape changes and assess any impact on front to back business functions Translate regulatory changes into federated portfolio of programs to address business requirements Budget cost of implementing regulatory programmes and set a baseline for ongoing and one-time costs Monitor actual regulatory costs through GL cost allocation back to regulatory cost drivers Have a coordinated planning and execution approach to regulatory change-and-run programmes through strong governance We have developed a fit-for-purpose customised approach which addresses each component of the framework in terms of analysis, design and implementation activities. Please contact us for more details on the approach and methodology for the framework implementation. VI. Contacts and Disclaimer For further information on how to implement a strategic transactional cost management framework into your organization, please contact: Nicolas Tollie, Nicolas.tollie@sia-partners.com Vincent Kasbi, Vincent.kasbi@sia-partners.com

7 About Sia Partners Sia Partners is an independent management consulting firm with expertise in Financial Services, Energy, Telecommunications, Manufacturing, Government and HR. Founded in 1999 in France, today the Group has an international presence in fourteen countries across Europe, North America, Asia and the Middle East with more than 500 consultants and revenues of $100 million. Find out more at Sia Partners. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. This publication has been prepared by and is distributed by Sia Partners for general guidance on matters of interest only, and does not constitute professional advice. While we take precautions to ensure that the source and the information we base our judgments on is reliable you should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and, to the extent permitted by law, the authors and distributors do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.