“The Utility model is the future for financial regulatory compliance.” But how are banks faring with this major transformation?

Rise of the Utility Model

The burden of regulatory compliance placed upon banks and other financial institutions has reached unprecedented levels over the last decade. This is exacerbating the extreme cost and revenue pressures currently faced by organisations across the industry.

It is no surprise then, that a number of vendors have recently emerged offering common industry solutions, also known as Utilities, for outsourced compliance services. Typically, these solutions aim to centralise, consolidate and analyse anti-money laundering (AML) and know-your-client (KYC) data across the industry. They boast a high standard policy to safeguard against regulatory penalties and, crucially, a cost effective means of satisfying compliance needs.

As you would expect, the industry is optimistic for the Utility model. The majority of the G14 banks have already adopted one of these services and other banks are either in discussion with one of the providers, or watching developments closely.

However, this solution may not be the swift remedy many bank bosses are hoping for. Whilst undoubtedly a sensible future-state model with a broad range of benefits for institutions, there are a number of factors to be considered before transitioning to full Utility usage.

Implementation is Not Simple

Firstly, the difficulty of implementation must not be underestimated. The vendors providing Utility solutions are not simply data providers, and there is often an extensive integration and service transition period. The data currently held by both the banks and their clients is typically of poor quality.

The centralisation of this data into a Utility is mammoth huge one-off data cleansing exercise to arrive at the golden source. In addition, a Utility model used by multiple financial institutions inherently requires a large degree of inter-bank coordination which further complicates matters. For example, there is a need to develop a common set of policies that underpin the utility. This is no easy task as risk appetites are very different across the industry, and converging on a single standard inevitably means that compromises are needed.

Utilities will therefore require a significant amount of upfront investment from banks to make this successful. This is likely to include direct investment into the Utility, project management costs, dedicated on-boarding, outreach and operational resources, and a significant marketing effort. This utility concept is being launched in an increasingly complex area and there is no off-the-shelf proven model for delivery.

Moving the Market Will Take Time

Secondly, and more significantly, moving the market towards a full Utility model is not a straight forward endeavour. It is a case of prevention vs. cure. The Utilities aim to make banks future proof against the ongoing torrents of regulatory scrutiny, but there are no specific requirements that mandate the use of industry Utilities now. This could be a key blocker to market adoption.

The underlying reason for this is the human impact. Business is done through relationships and trust, and how the human interactions between banks and their clients are deeply entrenched within organisational culture. The Utility model is a disruptive force to this established way of working and the complex stakeholder landscape is proving resilient.

We have undoubtedly been hit with a tidal wave of regulatory compliance this last decade, but it is hard to predict what regulators will want in the next 12 or 24 months. With increasing levels of geopolitical risk on a global scale, might the intense focus on financial services lessen?

The proposed delay to MiFID II could be a prelude to this. If so, is the investment in utilities really necessary? Either way, a critical mass of both the banks and its clients is required to give assurance to the wider market.

Will Blockchain have an Impact?

With a seemingly limitless set of applications (albeit largely untested), could this distributed database technology challenge the single source concept behind the utility? It is too early to say for definite, but is another consideration for adopters of the service.

The Utility Model: the Future of Regulatory Compliance?

So whilst the utility model may be the future of financial regulatory compliance, we believe there are a number of interrelated factors that impact the success of the transition.

Fundamentally, the move to the Utility model involves the transformation of not only one organisation, but an entire market, and therefore the key question is how quickly can a critical mass be achieved?

This could be accelerated if regulators were to step in to mandate the use of Utility models. This is unlikely in most markets, but could be possible in localised regions and where regulators are involved from inception. In any case, as the Utility usage matures and adoption increases, regulators must take a more active role in endorsing the benefits of such solutions. However, will this provide the urgency most banks are looking for?

Bank bosses need to convince both their clients and their own organisations that this is the future operating model they want to adopt. Therefore, adoption will be closely linked to the ability to educate industry bodies, clients and internal bank stakeholders on the benefits of the model.

Banks also need to truly collaborate both with each other and external suppliers. This is crucial in developing common industry standards that can be adopted by all parties. Conversely the utilities themselves need to be flexible enough to the needs of different banks whilst providing a single solution. A significant stakeholder and change management effort will be required to make this successful, with a robust business case and benefits tracking.

Another crucial factor is the bank’s ability to achieve the right balance between the use of utilities vs. in-house services. Selecting the correct services to transition at the right time will be key to realising required benefits. To some degree this will be dictated by the pace of the broader market, but a robust, enterprise-wide transition plan will be required to ensure success.

So how will banks actually fare with this transformation? This will depend on their ability to deliver major organisational change and how they work with the Utilities to deliver the new business model.

This isn’t an easy task, so we expect a few bumps along the way.


Alex is a founding partner of Gate One. He has extensive experience of hands-on delivery of high profile, complex global transformation programmes, governance of £multi-billion change portfolios and building organisations’ capability to deliver change themselves.



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