Client Money Risk and the need for process transparency

The banking and financial service industry is under ever increasing scrutiny from the regulators. Under the microscope are the banking practices and procedures that affect virtually every area of the industry and every role.  There is a regulatory expectation, and in many cases, a requirement to create transparency, prove controls and procedures are in place and report on them.

Client money is a core function of any financial services company and as such should demonstrate the highest standards of process and control.  Failure within this area can be a reflection on the firm's overall control policies and procedures.

So why is this difficult?

Today a typical client portfolio is made up of many different asset class products. This tends to be at odds with how financial service companies are structured.  Generally they are aligned by product with a vertically supported management structure.  This does provide depth of product expertise and specialization but does not promote cross product analysis or settlement.

This makes transparency difficult, as processes which transcend organizational silos are prone to confusion and oversight is difficult to achieve.  In these times of change and growing regulation, financial service firms are even more vulnerable.  Internal consolidation and system replacement projects have been accelerated in the past 18 months.  There have been a number of high visibility mergers between some large and complex firms.  The potential in these situations for process breakdown and confusion is huge.

Creating visibility & accountability

The potential exposure to financial and reputational loss in this area is significan. To ensure full compliance in client money calculation and provision, it is necessary to fully identify and account for all client transactions, whether cash or trade.  Oversight is required across all asset classes, systems and outputs that operate within each of the product groups.

Identification and validation of a client transaction or the result of a client transaction is crucial.  To this end an accurate map of documented and approved procedures and controls needs to be put in place.  Furthermore, anyone performing a reconciliation or function involving client transactions and the related proceeds must have access and understanding of the procedures in relation to the role they are performing.  The introduction of user attestation around function and responsibility provides greater management ability to identify where issues occur and faster resolution.  Time factors are critical in client money calculations and provision.

Going beyond the map

The requirement to capture not just process but also the responsibility and controls around the process is now at the forefront of the financial service industry agenda.  Business process management is becoming the way of structuring, managing and measuring anything from productivity through to risk and market positioning.  Tools previously used predominantly by IT architects and process analysts, for gap analysis and system implementation, are now increasingly being used by a far wider range of roles to capture business processes and assist in the management of complex firm structures.

To capture a process in diagrammatic form is a quick and simple task, but it should not be seen as an end in itself.  Real transparency and business value comes about as a result of the process diagrams being governed as an integrated "map" which is understood and trusted by all stakeholders.

Using client money as the example, once the processes from client order and trade initiation through to confirmation and settlement is documented and understood; the real value can be added.  Aligning control or compliance requirements against individual functions and testing the validity and integrity of reference data to ensure all client data is allocated correctly to client segregated accounts is a large step towards business control and compliance.  It will also help senior management sleep at night.

The process map can be thought of as a "living" operations manual for the firm.  It provides transparency and visibility into all aspects of the business.  It should be simple enough so that every individual can use it and understand it but it should also act as a management tool to identify and implement controls and compliance requirements.