We are still seeing the impact of the post financial crisis regulatory changes taking effect and some very significant parts of it such as MiFID II have not even been implemented as yet.  However, we have already seen market participants and in particular UK brokers starting to make wholesale changes in their approach to technology. These can be boiled down into four key themes.

The first one is that UK brokers are looking at hotsourcing as their preferred method of running middle and back office operations. Hotsourcing is a new way of outsourcing. In today’s post financial crisis world, a financial institution’s activities and reporting processes are subject to much scrutiny. As a result, firms are feeling more nervous about wholesale outsourcing  as in some instances it is more of a challenge to demonstrate to regulators and to be sure themselves that the correct procedures are being followed, simply as there is less direct control. 

Previously, the alternative for firms was to continue to operate legacy systems and to manage operations in-house – albeit an inefficient approach. However, in the last few years, the onslaught of regulatory  requirements  have prevented this option from being a feasible one. More than ever  banks are realising the value in using third party service providers to prevent costly technology development, and to address the problem of legacy systems. As a result, banks and brokers are becoming increasingly selective, creating an optimised blend of the best of their own resources while using cost-effective operational processing, which is what we call hotsourcing. This means using the best of technology advancement – automation, straight through processing and the cloud – while retaining senior oversight of operational processes in-house, which is essential in a regulated environment. Rather than tearing down legacy systems entirely, this allows for a phased approach where institutions can test outsourcing of different business processes to find the most effective mix.

The second theme is future proofing: brokers want to make sure that whatever technology investments they are making, they are able to keep afoot with industry and regulatory developments as they evolve. In order to ensure technology is future proofed, systems must comply with accepted industry standards and systems should be component based - so that various elements can be swapped out if necessary. As part of this approach, brokers are selecting software solutions which can provide the flexibility to deal with volatility and high volumes. In our conversations with them, many have said that the recent volatility which occurred around the result of the UK EU referendum has demonstrated to them that they need to future proof their systems against further bouts of volatility which may occur as a result of big market shocks which are on the same scale as that of the UK EU referendum.

The third trend is that UK brokers are looking to work with technology vendors who have direct experience of the financial markets and who have practical knowledge of financial regulation. This means that while many offerings from fintech companies appear compelling in that the user interfaces are engaging and intuitive often they tend to have poor infrastructure that underpins them or simply a lack of financial or regulatory knowledge.  

The final theme is time to market. In a world where banks and brokers are under significant pressure to cut costs to a minimum as soon as possible, the ability of a vendor to deliver solutions to firms on time and budget is critical. This is why UK brokers are tending to opt to work with technology providers who have a long and proven track record in the sector or indeed, have firsthand experience of having worked in the banking or broking sector themselves.

Many UK brokers are on the verge of making big strategic decisions about their technology requirements for complying with existing and forthcoming regulation. In many cases, this will mean an overhaul of their entire systems and therefore they are applying principles which must be adhered to when selecting technology vendors to work with. While some of the post crisis regulation has been determined and implemented, there are large swathes of it yet to come - with MiFID II being just one example. We believe the framework which we have outlined here is a good checklist to ensure that banks and brokers select the correct route when overhauling their systems. Good technology today is future proofed to ensure that it can still be good technology tomorrow.