Compliance is a major factor that motivates financial institutions to invest in new technological resources, participants stated at a recent industry panel.
This type of expenditure might include new hardware such as servers, or more robust applications for data storage. In addition, firms could potentially find it worthwhile to examine their existing technical operations to determine ways to cut costs or lower the risk of compliance breaches.
Buy-side companies navigating challenging environment
The individuals who took part in this event are certainly not alone in citing compliance needs as being a major impetus for new spending on infrastructure. Buy-side firms such as investment managers and insurers are facing a challenging environment that involves rising expenses, sharp competition and complex regulations.
These companies are being pressed to both harness more information and also do so on a reduced budget. More specifically, fund managers and insurance firms are facing pressure to use a wider range of benchmarks to evaluate the performance of their portfolio managers.
Financial institutions reluctant to spend
In this situation, many buy-side firms are hard-pressed to open up the purse strings and invest in non-essentials such as upgrades to their existing technological infrastructure. To make such a move, they must feel confident it will provide them with an appealing return on investment.
In the aftermath of the financial crisis, lawmakers and regulators have passed several landmark reforms that have made compliance more challenging for buy-side financial institutions. For example, the Dodd-Frank Act has provided industry participants with new requirements in terms of the records they keep and the reports they produce.
At the recent Tokyo Trading Architecture Summit, Japanese financial institutions noted the financial challenges they are facing and how they sometimes need to invest in technology to ensure compliance, according to Buy-Side Technology. One person, a trading group leader for a financial institution in the Asian nation, emphasized that firms must consider many variables if they are thinking about bolstering their infrastructure.
“When we introduce new systems internally, the objective is to save money … So we need to invest money in order to find the bigger benefit for savings later,” he said, according to the news source. The market expert elaborated on the many other questions that must be asked. “Will we be more compliant with regulations? And do we reduce the operational risks? Can we root out those operational risks with new investment? That’s what we need to consider.”
Companies that purchase technology to boost their odds of complying can generate an appealing return on investment by avoiding costly fines. In addition, these firms should consider how complying can help them manage reputational risk. Kenji Toyooka, senior manager for a major Japanese asset manager, noted these concerns when speaking at the panel, the media outlet reported.
“Can we create new efficiencies and recover our cost of investment? These are the driving forces for investment,” the market expert stated, according to the news source. “If compliance needs are relevant, then top management may invest, but other than that, if there isn’t a compliance angle, the top will say, ‘What about the cost and the cost efficiency?’ That may prevent us from investing into necessary systems.”