Balance cost, efficiency, and effectiveness

Considerations for Risk & Compliance leaders

KPMG financial services risk, regulatory and compliance solutions for growth and profitability

Across the financial services sector, organizations face increasing pressure to grow, enter new markets, and innovate while working against the need to do more with less. This dynamic is not unique to the financial services industry. What is unique, however, is the highly complex nature of the risk, regulatory and compliance landscape that firms must navigate. First and second line executives have labored successfully to balance the cost associated with effectively managing risk with the commercial realities of the business—no small matter. However, economic headwinds before us, the high price of labor, heightened regulatory expectations¹ and the increased commercial needs that come with growth all conspire to dislocate a carefully aligned cost-to-value ratio and to permanently alter the cost-growth curve. This has led to an increased focus on optimizing spends, impacting the risk and compliance function in material ways. In fact, 83% of global financial services firms that responded to a recent KPMG survey² stated that they are refocusing their cost optimization efforts and 85% are accelerating them.

KPMG understands that the risk and compliance functions are not immune to these cost optimization pressures and will be asked to contribute to the periodic rebalancing of spend to align with both the commercial needs of the business and the regulatory requirements associated with its size. Further, we appreciate the challenges associated with cost optimization efforts in this function when many of their efforts are targeted at resolving substantial matters brought to the organization by one or more of their regulatory partners. The reality is that risk and compliance functions across the first and second line will need to reset the baseline of what it will take to meet their various obligations today, while altering the slope of the cost curve associated with new requirements sure to come.

To that end, KPMG has devised a series of offerings focused on addressing this challenge. In principle, these offerings drive progression across a set of targeted benefits that ultimately enable such functions to operate more leanly with a firmer foundation to scale with the business in a manner that adds cost slowly over time. In essence, this is achieved by endeavoring to simplify, modernize, and optimize.

The market is focused on reducing cost

Firms refocusing their
cost optimization efforts

Firms accelerating their
cost optimization efforts

Firms looking to reduce their cost basis
by more than 10% in 3 years

Source: KPMG "New Cost Imperatives in Banking," https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2021/04/new-cost-imperatives-in-banking.pdf | PDF, 2021

Signals intelligence:

Reading the capital markets for IPO and SPAC timing

While every company’s mix of deal-valuation drivers is unique, some market indicators are broadly relevant. Below, a selection of market indicators, updated quarterly.

Three value drivers of risk and compliance functions

In our experience, risk and compliance functions can harness three key levers to drive risk and compliance efficiency.

Simply

Rationalize the disparate risk, compliance, and control assurance frameworks, roles, and responsibilities, and converge functions, data, tools, processes, methods, governance, and reporting within and across the first and second lines
Normalize, reengineer, and automate stable, repeated

Modernize

Migrate risk and compliance controls into core platforms and digital-business environments and adjust first and second line accountabilities
Integrate advanced technology, data and analytic techniques and retire legacy approaches and implement more cost-effective methods
Migrate environments to the cloud

Simply

Utilize quantitative and empirically proven methods to improve the quality of alerts and reduce the volume requiring resolution
Migrate workforce to more efficient and lower cost execution models, including “As-a-Service” execution
Source “Staff-to-Expected” / “Surge-to-peak” resourcing

Simply

Rationalize the disparate risk, compliance, and control assurance frameworks, roles, and responsibilities, and converge functions, data, tools, processes, methods, governance, and reporting within and across the first and second lines
Normalize, reengineer, and automate stable, repeated

Modernize

Migrate risk and compliance controls into core platforms and digital-business environments and adjust first and second line accountabilities
Integrate advanced technology, data and analytic techniques and retire legacy approaches and implement more cost-effective methods
Migrate environments to the cloud

Firms can leverage these solutions to help them balance cost, efficiency, and effectiveness and ultimately achieve sustainable scalability across the organization:

Control Assurance Convergence
Regulatory Obligation Management
Fraud
Model Risk As-a-Service

Risk and Compliance Convergence
Credit Reimagined
Surveillance Strategy
Supervision Strategy and Optimization

Solutions to balance cost and efficiency

KPMG has developed the following solution suite to deliver against cost and efficiency needs our clients are addressing today.

Solution	Benefits Delivered	Scale of Opportunity	Value Drivers
Solution	Benefits Delivered	Scale of Opportunity	Simplify	Modernize	Optimize
Control Assurance Convergence	A control assurance framework that will: Leverage a “Test Once/Use Many” framework (net reduction in test execution) Balance execution vs reliance framework to reduce redundancy across the lines of defense Drive organizational consolidation and rationalization efforts through automation and standardization	High
Regulatory Obligation Management	Technology-enabled global regulatory change identification and management framework to: Reduce legal and compliance spend and to identify, rationalize and onboard new regulations globally Facilitate the mapping of ownership, policies, controls and testing to said obligations	High
Fraud	Advanced approach to fraud analytics and technology to: Improve detection rates, enable real-time detection, and reduce losses Reduce “falsely blocked” transactions requiring costly resolution Reduce time to resolve detected transactions and improve customer experience Identify detection gaps and strengthen proactive controls Convert advanced fraud algorithms to engineered features to reduce time spend on tracking, reporting and regulatory scrutiny/review	High
Model Risk As-a-Service	A technology enabled "As-a-Service" offering to: Host model risk automated processes and data in a cloud solution Deliver pre-defined documentation for key model components Execute model risk activities in credentialed, but lower cost locations Manage quality to meet commercial and regulatory requirements	High
Risk and Compliance Convergence	A comprehensive method to simplify all first and second line risk and compliance frameworks and functions to principally: Rationalize and collapse disparate risk and compliance frameworks globally into a single consistent and integrated framework including taxonomies, critical data feeds, assessment methodologies and approaches, etc. Assess risks and controls once—for multiple purposes Reverse governance venue proliferation Eliminate organizational overlap and redundance in first and second line risk and compliance functions Converge second line functions	High
Credit Reimagined	Front-to-back reengineering of credit processes and methods to: Digitize credit underwriting of loans from origination through servicing Converge disparate underwriting and credit policies, rating and analytic methods, and processes Consolidate different supporting technologies from customer acquisition through loan disposition Automate resource intensive processes through low-code, cloud migration, and other technologies and strategies	Med - High
Surveillance Strategy	Employ data, advanced analytics, machine learning, and “As-a-Service” skilled resourcing to: Reduce false positives and increase the efficacy of high risk/high alert volume surveillance patterns, freeing up FTE to pursue more value-added activities Strengthen the underlying surveillance ecosystem with monitoring controls to proactivity identify anomalies that indicate potential gaps or weaknesses Decrease the per alert cost of remediation efforts through automation, standardization, and data augmentation for both BAU and surge support	Medium
Supervision Strategy and Optimization	Deploy methods developed in Risk Simplification to reengineer Supervisory functions in markets businesses to: Reduce the volume of, and increase quality of supervisory alerts requiring resolution by supervisors Provide a clearer connection between supervisory activity and requisite supervisory objectives Improve and streamline supervisory reporting and activity to rationalize first vs second line activity and responsibility	Medium

DRY POWDER AVAILABILITY

Headline

SEC continues to bring amendments to the rules specifically regarding projections, disclosures and underwriters, resulting in curbing the growth of SPAC IPOs and M&A

SEC Rules and Guidelines for SPACs

SEC proposed new rules regarding investor protections and disclosure requirements with respect to, compensation paid to sponsors, conflicts of interest, dilution, and the fairness of business combination transaction due to the abysmal performance of De-SPAC companies.

Proposed safe harbor for SPACs under the conditions that the SPAC's assets consist solely of certain types of securities and engage in only 1 De-SPAC transaction which it should complete with 24 months

Increased transparency in financial projections by eliminating the safe harbor provisions.

Alignment of De-SPAC transactions with traditional IPOs by requiring target companies as 'co-registrant' and requiring underwriters involved in SPAC IPOs to also underwrite respective De-SPAC transactions

Rule 140a treats the SPAC IPO and De-SPAC transaction as one continous distribution of securities which further would mean that anyone who has acted as an underwriter of a SPAC and directly/indirectly participates in a de-SPAC transaction to also be deemed as an underwriter in the de-SPAC transaction

Enhancing disclosure requirements to include potential conflict of interest, dilution of shareholder, interest, compensation earned by sponsors etc.

Key comments from participants on SEC's new rules

Headwinds

Implied Probability of U.S. Recession

10y1y U.S. Treasury Spread

Rising interest rates - Higher interest rates will dampen housing demand and create new costs for borrowers. The Fed is expected to raise rates at just about every meeting (8x) this year.
Consumer price inflation in June 2022 9.1% - Inflation is eroding .consumer purchasing power and accelerating a tightening of monetary policy.
The contraction in first quarter GDP hid growth in consumer spending.
Risks of a recession over the last twelve months are rising, but not yet a level that indicates a recession is imminent.

Real GDP and Consumption Report

Quarterly growth, SAAR

Federal Reserve Rate Path

Percentage Point Change from First Rate Hike

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Turn challenges into opportunities

KPMG has evolved its service offerings to deliver against the spectrum of needs our clients have as they navigate the complex business and operating environment of the global marketplace. Each of our offerings were designed to deliver against the value our clients seek across their growth, cost and efficiency, regulatory, and market stewardship needs. As your organization’s needs evolve, KPMG can work with you to migrate your firm and its capabilities to a state where you are better prepared for the challenges that lie ahead.