At a recent Fenergo industry roundtable event, the topic of Regulatory Client Outreach took front and centre of the evening’s discussions. Around the table, representatives from some of the leading financial institutions spoke about ongoing challenges of
managing and evidencing regulatory compliance across a range of frameworks.
Regulatory Client Outreach has been a fairly prevalent feature in many financial institutions since the introduction of Dodd-Frank and EMIR, both of which mandated the collection of additional data and documentation to comply with new OTC trade rules. And
it really hasn’t stopped there.
As new regulations are introduced by global regulators (CRS and Margin Requirements being two that immediately come to mind), the onus is on financial institutions to comply with increasingly stringent regulatory obligations by collecting, harvesting and
re-using client data and documentation.
There exists a positive correlation between client outreach efficiencies and the ability to meet compliance deadlines on time. Indeed, a proactive client outreach program has the potential to provide a strong evidentiary defense in the face of regulatory
scrutiny, penalties and reputational damage, and can contribute substantially to the creation and maintenance of strong client relationships.
However, despite its obvious potential benefits, building an effective regulatory client outreach program represents a sizeable logistical and operational challenge for most financial institutions. Depending on the regulation and the updated/new obligations
that it brings, thousands (or even hundreds of thousands) of clients could potentially be in-scope. Below we have outlined three prevalent challenges experienced by financial institutions all across the US, UK, mainland Europe and Asia Pacific.
1.Manual Identification of Clients & Required Data / Documents
To perform client outreach, all in-scope clients firstly must be identified. This means that the financial institution must be able to determine, by correctly interpreting the regulations for which clients fall into scope. This involves creating a list of
potential clients, usually derived from several internal systems and repositories, each of which can contribute a different set of information relevant to the client regulatory determination.
The second step involves identifying the outstanding data and documentation (if any) required to evidence the compliance process for the regulation at hand. The ideal solution is to determine what data and documents can be re-used before contacting clients
to submit (or re-submit in many instances) these artefacts to support the new regulatory requirements. In previous research on this, Fenergo found that between 5 and 100 documents must be submitted during the initial onboarding stages to support compliance
and business processes and these represent a wealth of reusable content.
The downside is that many financial institutions that lack a centralized master data solution and instead use several data repositories may find it exceptionally difficult to locate and re-use client data and documentation already submitted for other regulatory
purposes across various business lines and/or jurisdictions. This puts increased pressure on the financial institution to contact clients in the first instance. The same research (mentioned above) also suggested a link between asking clients to re-submit data
and documentation and the impact it can have on the client experience and relationship with the bank.
The final element of the client list involves segmenting the clients according to the type of correspondence they need (e.g. different types of clients may require a different letter / email). This segmentation needs to be flagged or grouped accordingly.
2.Time & Resources of Client Correspondence & Outreach
In terms of outreach methods, clients with validated email contact details are normally emailed the request for information from a dedicated email mailbox. Different mailboxes are usually created for separate outreaches. Where a client does not have validated
email contact details or where it has been determined that a postal outreach is necessary, a file of client details is sent to a third party delivery company for postal outreach. A final strand of the outreach program may involve follow-ups (or reminders)
by phone from either Sales or Client Services, particularly to priority clients.
3.Monitoring & Reporting on Client Responses:
However, all of this can be quite a time-consuming and laborious process, hampered further by the manual monitoring of responses, which characterizes most regulatory client outreach programs. Some financial institutions have in place tracker applications
to track the responses from the in-scope client base, while most rely on spreadsheet trackers. If different mailboxes are being used, then each one needs to be monitored on a continual basis, with updates usually being manually recorded in either the spreadsheet
or application tracker. Then these updated tracking reports and MIS must be distributed (often manually too) to management and Sales. As a highly manual process, this adds significantly to the operational challenges that go hand-in-hand with client outreach.
Automating this process is sorely required. In my next blog, I will outline 4 best practice elements that can be easily automated, providing for a more consistent and tracked regulatory evidentiary process.