Regulation education

Consultants are being asked to hold firms hands as they enter the brave new world of increasingly heavy regulation. Victoria Tozer-Pennington talks to the leaders in this years rankings about where theyre seeing the most demand for their guidance

he demand for consultancy services continues to increase. Financial services firms have continued to expand through a period of regulatory uncertainty and change. Demand for regulatory strategy advice has been particularly strong, as firms look to incorporate the emerging financial regulatory regime within their overall business strategy. In the area of regulatory consulting, operational risk, and risk management in general, we have seen a continued up-tick in growth from all clients, across all industry sectors, says Hank Prybylski, leader of Ernst & Youngs global financial services risk management practice, based in New York. This is worldwide. One of the most fascinating things for us as a large connected global business has been that over the past 18 months the supervisory focus in different countries has been following the same path living wills started in the UK and moved to the US for example. So there might be some differences jurisdiction to jurisdiction, but the trends are entirely consistent. The Group of 20, the EU and the US continue to focus on financial reform. As all-encompassing legislation such as the Dodd-Frank Wall Street Reform and

Consumer Protection Act comes into force, financial services firms need to look to how they can respond. But it is no longer enough for firms to simply comply with the new rules. One thing I have been struck by when clients talk about the risks that keep them up at night is the common need to focus on how their business can continue to evolve through this period of regulatory change, says Prybylski. Regulatory strategy is a key area for firms, as well as the fairly traditional risks to manage market, credit, operational and reputational risk. Moreover, he says, as firms come out of the financial crisis and look at how they can improve their risk management practices based on the lessons learned, they want to find ways to use that as a competitive advantage. Firms always had a business strategy but they now need to make sure it is consistent with the emerging regulatory landscape. It [risk management] has grown from meeting broad supervisory requirements for capital, to where firms need to fully consider their business models, legal entity structures, governance structures and product lines in order to

THE OR&R 10
2010 1 2 2009 1 2 Ernst & Young % 13.7

KPMG PricewaterhouseCoopers Deloitte

Accenture

13.2 11.6 11.5

8.7

3
4 5 6 7 8 9 10

4
3 6 5 9 8 7

SAS
SunGard Oracle Consulting Protiviti RiskBusiness

8.2
5.4 5.2 5.1 4.8

be positioned for the new global financial landscape. The central message from Ernst & Young, the overall winner of Operational Risk & Regulations consultancy rankings for 2010, is that risk management and the enterprise risk management framework supporting it need to be viewed as a competitive advantage. If firms focus on that as a competitive advantage

Reprinted from Operational Risk & Regulation November 2010

they are almost always going to meet the supervisory requirements related to risk activities, says Prybylski. But, he warns, getting the balance between regulatory response and competitive advantage is getting harder and harder given the amount of change going on and the management time it takes firms to respond. We advise our clients to ensure that the things they are doing today are consistent with longer-term strategies. Many consultants report strong demand for services as firms launch initiatives to focus on risk-identification processes, aggregating compliance and operational risk and financial risk areas such as the Sarbanes-Oxley Act into one framework to ensure they get the holistic picture regulators are looking for. We are seeing demand broadly across the whole operational risk domain, says Prybylski. Our clients are focused on risk identification, control monitoring and oversight,

and convergence bringing together operational risks that might occur in different processes such as compliance risk and financial op risk, and within a common focus for risk management improvement as well as integrating op risk into a more firm-wide risk measurement. Two years ago, with Basel II implementation, the focus was more on quantification. Demand for business process improvement services as well as data management and security issues is also up. Oracle Consulting Services topped the rankings for customer data security. Developing software demands understanding business requirements, and understanding clients needs is what consulting is all about. The two go hand-in-hand, says Peter Hill, vice-president, GRC and operational risk, at Oracle Reveleus, Oracle FSS. Data management and security will be crucial for firms in the new environment as regulators request that

FRAUD/FINANCIAL CRIME PREVENTION

2010 1 2 3 4 5 2009 1 2 3 4 5 Ernst & Young KPMG Deloitte PricewaterhouseCoopers SAS % 15.1 14.3 13.9 11.1 7.4

BUSINESS PROCESS IMPROVEMENT

2010 1 2 3 4 5 2009 4 1 3 5 2 Accenture Ernst & Young KPMG PricewaterhouseCoopers Deloitte % 16.1 15.4 14.3 14.0 12.4

ENTERPRISE-WIDE COMPLIANCE & RISK MANAGEMENT STRATEGY

2010 1 2 3 4 5 2009 1 3 5 4 2 KPMG Ernst & Young PricewaterhouseCoopers SAS Deloitte % 16.4 16.3 12.6 9.3 8.4

OP RISK SOFTWARE SELECTION AND IMPLEMENTATION

2010 1 2 3 4 5 2009 1 4 5 2 3 Ernst & Young KPMG PricewaterhouseCoopers Deloitte Accenture % 14.5 12.0 11.8 11.3 11.2

firms submit more data and show they are able to access data across the organisation to demonstrate their horizontal view of the risks they are running. We are also seeing strong demand for ongoing improvements and implementation regarding data quality and granular methodologies as firms look to improve their calculations and make enhancements, as well as ensure regulatory expectations are consistent with their capital, says Prybylski. Basel II and Basel III are driving demand for consulting services around the world. In the US, implementing Basel II remains a high priority for firms, but there and across the rest of the globe the question is what the changes to the international Accord will mean for firms operations. We are still working on Basel II in the US but also on the multiple challenges of Basel III a lot of it is trying to understand the business implications, including those covering the trading book and securitisation, says Prybylski. Another immediate focus for financial services is the bid to strengthen corporate and risk governance. The demand for improvement in this area is coming from all company stakeholders boards of directors, shareholders, auditors and regulators. We are spending an incredible amount of time with the risk committees of the board, really looking at the key governance issues where firms are focused to help link the board-level responsibilities with best practices, says Prybylski. Both risk and corporate governance are a strong demand from clients. Papers issued by a number of regulatory bodies, from the EU to the Basel Committee and the UK Financial Services Authority, have placed considerable emphasis onto boards of directors understanding the risks their companies face. Firms seek advice on the boards role and the definition of their risk appetite, as well as on how to optimally align different committee structures to regulatory expectations, specifically in the areas of risk appetite, risk management, strategy setting and
operationalriskandregulation.com

compensation. Many consultancies report an increase in demand for this type of governance advice and board education over the past 1218 months. Ernst & Young has seen significant demand for risk training for committee members, which is consistent with the new requirements. During a downturn, fraud and financial crime always increases and the need for services in this area has increased with it over the past year, although there has been no change in the order of consulting firms in the top five rankings. But it is reputational risk consulting, not categorised separately in the rankings, that is an increasingly requested service. The financial crisis has shown how devastating adverse media attention can be to a firm. Goldman Sachs, for instance, has experienced damage to its reputation following the mis-selling allegations and subsequent settlement arrangement with the US Securities & Exchange Commission. Although it is not seen as a separate risk type but as a consequence of other risks, managing reputational risk has become a big issue for firms. Reputational risk is one of those things where you can say you dont have it, but it is embedded in almost every category. When managing any traditional risk, the effects on reputation and brand need to be considered, says Prybylski. Consultants expect demand throughout 2011 2012 to come from firms response to financial regulatory reform, both at a country and a global supervisory level. Firms will need to shape their business strategies in response to rule changes, which makes strategic risk an issue of paramount importance. The politics around financial regulation are highly charged and equally the expectations of the regulators will also be high. Financial services firms will need to ensure they are doing all they can to respond to and manage that, which will ensure continued demand for consultancy services.
November 2010

ANTI-MONEY LAUNDERING
2010 1 2 3 4 5 2009 1 2 3 4 KPMG Ernst & Young Deloitte PricewaterhouseCoopers SAS % 15.8 15.4 12.2 12.1 8.0

REGULATION STRATEGY
2010 1 2 3 4 5 2009 1 3 4 2 5 KPMG Ernst & Young PricewaterhouseCoopers Deloitte Accenture % 17.3 17.2 17.1 14.4 13.9

CORPORATE GOVERNANCE
2010 1 2 3 4 5 2009 2 4 1 3 Ernst & Young KPMG Deloitte PricewaterhouseCoopers Accenture % 14.3 14.1 13.2 12.0 10.4

CUSTOMER DATA SECURITY

2010 1 2 3 4 5 2009 3 2 1 Oracle Consulting SAS SunGard Ernst & Young Deloitte % 12.7 12.3 12.1 11.8 11.5

OPERATIONAL RISK
2010 1 2 3 4 5 2009 1 2 5 4 3 Ernst & Young KPMG PricewaterhouseCoopers Deloitte SAS % 15.2 14.5 11.5 11.3 7.8

TREATING CUSTOMERS FAIRLY

2010 1 2 3 4 5 2009 2 1 3 4 Ernst & Young KPMG Deloitte PricewaterhouseCoopers Accenture % 16.7 16.1 12.5 12.1 7.5

BASEL II/III
2010 1 2 3 4 5 2009 2 1 4 3 5 Ernst & Young KPMG PricewaterhouseCoopers Deloitte SAS % 14.9 13.2 12.0 10.7 7.1

COMPLIANCE SOFTWARE
2010 1 2 3 4 5 2009 3 1 2 4 5 PricewaterhouseCoopers Ernst & Young KPMG Deloitte Accenture % 14.1 12.9 12.3 11.3 9.8