Tuesday, October 21, 2008

Financial Service Companies Need to Prepare for New Regulation

We’re in the midst of a mortgage crisis. Call it a natural extension of capitalism, where greed can inspire unregulated “innovation”. That greed is now coming home to roost.

This problem has many moving pieces and it's difficult to describe in an elevator pitch. By the actions of our leaders and bankers, mortgage lenders were inspired to write dubious mortgages, and the US population was encouraged to apply for them. At first, these unchecked mortgages lead to more free cash, more spending, and a boom in the economy. Unfortunately, the boom was built on a foundation of quicksand. It forced us to take drastic measures to bring balance back to the system. The $700 billion bill already passed is an example to those measures. Hopefully for our government, we won’t need too many more balancing measures.

So where do we go from here? The experts say that the best-case scenario would be for the world economy to do well - unemployment stays low, personal income keeps pace with inflation and real estate prices find a bottom. I'm optimistic that we'll see that day soon. Many of the experts aren't so sure.

One thing that history teaches us is that regulatory oversight is bound to get stiffer after this fiasco. We had similar “innovations” in capitalism with the savings and loan scandal, the artificial dot-com boom, Enron, Tyco and WorldCom. Those scandals where followed up by new worldwide regulations like Sarbanes-Oxley, Bill 198 (Canada), JSOX (Japan) and Deutscher Corporate Governance Kodex (Germany) to name just a few. These laws tightened oversight of the accounting industry and toughen corporate disclosure rules. They also moved to make the leaders of corporations more personally liable for reporting irregularities.

The same should be true after the mortgage crisis. The types of loans that have brought us to this situation may only exist in tightly regulated form in the future. In the coming months, we should see a renewed emphasis on detecting fraud at every step of the process. For the financial services industry especially, it will be more important than ever to have good clean data, accurate business intelligence and holistic data governance to achieve the regulations to come.

If you’re running a company that still can’t get a handle on your customers, has a hard time detecting fraud, has a lot of missing and outlier values in your data, has many systems with many duplicated forms of data values, you’ll want to get started now on your governing your data. Go now, run, since data governance and building intelligence can take years of hard work. The goal here would be to begin to mitigate the potential risk you have in meeting regulatory edicts. If you get going now, you’ll not only beat the rush to comply, but you'll reap the real and immediate benefits of data governance.

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Disclaimer: The opinions expressed here are my own and don't necessarily reflect the opinion of my employer. The material written here is copyright (c) 2010 by Steve Sarsfield. To request permission to reuse, please e-mail me.