Since passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most dramatic regulatory reform to hit the financial sector since the 1930s, much attention has been paid to the costs of compliance.
This is not surprising because the industry will probably spend $3 billion to $5 billion in the next three years to comply with the law.
Largely overlooked in the debate, however, is another reality: If tackled smartly, the reforms present business opportunities. The winners will make compliance requirements pay double-duty — as a catalyst for cost-cutting and for gaining insight on their customers and their risks in order to be more competitive.
Gearing up for this challenge will require going well beyond business as usual.
For example, two-thirds of the more than 100 financial industry executives that Accenture recently surveyed believe that Dodd-Frank will require their companies to rethink their business models. And nearly as many think it will require them to revise long-term business strategies.
Treating the Dodd-Frank Act as a one-time compliance effort would be a mistake. After all, we do not have to look back too far to see the perils of trying to adopt regulatory reform piecemeal.
Those banking companies that built the infrastructure separately from their existing systems to implement Basel II then spent even more integrating the two.
However, those institutions that incorporated their new Basel II capabilities into their overall business strategy, thought about capital in terms of managing the whole business and thought about risk in terms of pricing their products came up with a much more efficient answer.
It is even more crucial that companies take a cohesive approach to complying with the Dodd-Frank Act because the costs of implementation will be higher and the impact far broader, at a time when fewer profits are available to pay the tab.
Now that the reform legislation has been signed into law, most of its provisions take effect immediately, though some are subject to study periods or lengthier implementation timetables. However, all its provisions take effect by the end of 2013.
To transform what would otherwise be a costly and onerous implementation exercise into an opportunity to drive return on equity, banks need to address all aspects of the reforms together and devise a five-year plan.
Underlying the plan are three key building blocks:
• Be able to demonstrate mastery to regulators of your products, processes, technology, disclosure, risk management and capital requirements, including the ways these link up across the bank.
• Understand and plan for change by stress testing your business model to determine weaknesses. Consider which business lines to enter or exit, what products should be reengineered, what new risks need monitoring and what data capture and reporting systems will be needed.
• Assess how each department can address the shortfalls that are found, document the response with a "change road map," and be prepared to communicate your plan to regulators.
Banks next need to think about how they will carry out their plans, at the same time as they comply with the new regulations, using a single set of business process changes, new data attributes and systems changes.
For example, the Consumer Financial Protection Bureau will require companies to track consumer transactions and fees in-depth. Rather then spending millions of dollars to create a database that those in charge of consumer product development will not even see, savvy banks will build that data into their customer management systems to enhance customer service and product development.
Similarly, significant sums will be spent developing complex "funeral" plans — demonstrating to regulators how the business, in a worst-case scenario, would be wound down in an orderly way. If those plans simply lie in a corner at the institution, an opportunity would be lost and a lot of money wasted.
Funeral planning will be an onerous undertaking, requiring banks to trawl through every aspect of their business. But by integrating that function with process improvements and risk assessments, funeral planning can serve as a comprehensive and continuing review of operations that helps eliminate excessive complexity in a bank's systems and processes.
Without a doubt, the act will increase costs, potentially hurt profits and pose significant strategic questions about how to prop up return on equity.
So it is crucial to tackle these reforms by developing a master plan and making one set of business, technology and data changes across the enterprise.
Banks pursuing such a strategy will have the insight and competitive platform needed to stay one step ahead in the new financial landscape.
