Change has been inevitable in the financial services sector. Whether that change has been imposed by the regulatory bodies, forced by new accounting standards or a necessary reaction to events in the economy.

There has been a tumultuous series of events impacting financial services over the last ten years.

The decade opened with the existing hangover from the 2008 financial crisis and the austerity measures that were introduced. We then had the Brexit referendum result in 2016 with its resulting pound sterling devaluation; a pandemic in 2020 with UK economic contraction; conflict in Ukraine commencing in 2022; the Truss-Kwarteng mini-budget followed by recession; and now conflict in Gaza creating greater uncertainty.

These, mainly global, impacts have been overlaid by significant new regulatory burdens: COREP implementation in 2013; FINREP in 2014; ALMM in 2016; PRA 110 in 2019; the Investment Firms’ Prudential Regime in 2022; and organisations preparing for Basel 3.1 in 2025.

And then to make sure no organisation has had any respite in the “quiet” periods, in 2018 IFRS 9 accounting for financial instruments was introduced with its resulting impact on credit impairment provisions, hedge accounting and interest income recognition.

Unfortunately, for financial service businesses, past performance is an indicator of future expectations, and so nobody should expect the next decade to be uneventful. What the past decade has taught financial services companies is that managing these changes in a proactive and controlled manor is of paramount importance for survival and continued business success.

This article considers the importance of cooperation and strategic relationships to thrive in times of change.

Regulatory Change

As summarised above, the constantly evolving landscape of financial regulation presents a multiplicity of challenges for firms operating in the financial sector.

To effectively manage this risk, financial institutions must adopt a proactive and adaptable approach. Having an internal team dedicated to staying abreast of regulatory developments is clearly of great importance. However, these teams should be responsible for not only interpreting new regulations but also pragmatically assessing their potential impact on the organisation’s operations.

This largely internally focused approach can be strengthened by engaging with external third parties whether they are trade bodies, lawyers, accountants or specialist software suppliers. Ongoing engagement, particularly with their selected regulatory software provider, helps to ensure that the financial service firm and its vendor of choice are aligned in their plans for rolling out change in any particular area and making sure it is done so in a controlled and timely manner.

The Whistlebrook approach has always been to work closely with our customers, and industry experts, to ensure our regulatory reporting tool (WIRES) is always ready on a timely basis for the next regulatory change. For Whistlebrook the introduction of COREP in 2013 was the catalyst for the operating model we continue to use today.

Our charter client for addressing the requirements of COREP was a very established & highly regarded Bank, with whom we were already working in other, but unrelated, areas. The Bank had used many different suppliers for their regulatory reporting and were not happy with the responsiveness, customer service or attention to detail from any of them. The Bank needed a solution for COREP they could depend on being delivered, and having a long-standing existing trusted relationship with the Bank, we agreed we would work together to build a new system to meet the regulations requirements. The WIRES product was ultimately adopted by the Bank and that partnership was the catalyst for the product now being used by more than 50 institutions in the UK.

Whistlebrook has continued using that collaborative approach over the last decade and as regulations change and evolve, we see the benefits of maintaining a close relationship with our users continue to manifest themselves.

Whistlebrook has an active WIRES user group that meets at least twice a year and more regularly if necessary. The purpose of these meetings is multifaceted; Whistlebrook will brief our customers on what changes are being introduced to the product and use their feedback to refine our development plans.

And most importantly the User Group meetings are a vehicle for both vendor and customer to gain a mutual understanding of regulatory changes that are being introduced so that we can all plan a timely & accurate deployment for the necessary software changes. The model has worked with great success for complex changes such as the implementation of PRA10 and the current consideration of the requirements for Basel 3.1

Changes in accounting standards

There is an interesting case study on the impact of managing the evolution of accounting standards when considering the introduction of accounting for basic financial instruments and the subsequent complexities of recognition, derecognition and effective interest rate calculation.

The accounting for basic financial instruments was a fundamental change in accounting approach and one that existing software solutions and back-offices had not been designed to handle. The inevitable and understandable result was that 99% of organisations ended up using an in-house built spreadsheet to try and manage these complexities. And a corollary of that decision was inviting into the organisation the inherent and well acknowledged risk of spreadsheet and keyman reliance. Yet again, this highlights the importance of a firm identifying and planning for changes proactively but also the relationship between a firm and their software supplier to address the challenge that is not a “make-do” spreadsheet solution.

At Whistlebrook, we have always taken a pro-active approach when dealing with anticipated changes. Indeed, when the changing of standards for fee and interest income recognition was announced we quickly identified that this was a going to be a significant challenge for many of our customers, and the industry as a whole.

Whistlebrook held several workshops with a group of firms from the sector to identify the challenges and whether this was something that would be suited to a software product; that we could design and build in collaboration with our customers. It became clear quite quickly that this was something we could help with and over a number of weeks, we created the initial version of our Fee and Interest Income Recognition tool (WBEIR) This was then refined through working closely with a charter client to ensure that all the required core functionality was included.

The resulting software product was then adopted by our charter client and has now been implemented across multiple firms and remains the only productised software solution for basic financial instrument accounting in the UK.

Economic Change

Changes to accounting standards and regulations are usually implemented within a timetable over a few years and hence come with a degree of warning, thus allowing firms to implement these changes in a controlled way, over a period of time. Economic shockwaves often do not offer this luxury. As such, in the absence of a crystal ball, it is critical that firms have the systems in place to help mitigate the associated risk and equally critical that these systems are fit for purpose.

Whistlebrook’s collaborative approach to the development of its Asset and Liability Management product (WALM) has seen input from our customers as charter clients, industry practitioners and senior ex-regulators. The initial collaboration with our customers in the early stages of the development of WALM again helped to ensure that all the required core functionality was included. The subsequent work with independent industry experts allowed us to gain valuable, un-biased feedback, and insight into the product to ensure that the necessary additional functionality was added to allow firms to effectively manage the risks in an increasingly volatile economy.

We also continue to work closely with customers and our other industry contacts to ensure a constant feedback loop is in place to ensure the product continues to evolve in a way that helps to guarantee the product remains fit for purpose.

The successful management of change is determined by the ability to plan for what can be foreseen and to be quick to react to those events that cannot be foreseen. Unless an organisation is in the luxurious position of zero dependence on third parties then your success is only going to be as strong as your broader relationships.

When considering a software partner don’t just consider the mirage cast by the shiny packaging and smooth words you hear today but look at how those organisations have navigated historical change with consistent delivery, time and again.

by David Webber
Chief Executive Officer at Whistlebrook