Nathaniel Palmer: Thank you for tuning in. Today we are joined by Andrea Kramer, one of the keynote speakers at our upcoming BPM in Banking, Finance and Insurance conference.
Andrea has very distinguished background so I am going to take just a moment to tell you about her. She is a is one of the world’s most respected authorities on Dodd-Frank and is partner in the international law firm of McDermott Will & Emery and head of its Financial Products, Trading and Derivatives Group
She testified in an historic joint hearing of the Senate Committee on Finance and the House Committee on Ways and Means on Derivatives Tax Reform and has earned the distinction as one of the 50 Most Influential Women Lawyers in America.
She is the author of the leading and definitive guide to financial products law and taxation as well as many other published works on Dodd-Frank compliance.
Andrea, thank you for joining us today
Andrea Kramer: Well, thank you very much Nathaniel.
Palmer: It's our pleasure. Andrea, while most of our audience will be familiar with Dodd-Frank, could you just start off and give us a quick overview on what this means for the financial services industry?
Kramer: Well the question that you just asked me, I could probably take about two weeks to answer. So I am going to try to boil it down into something by size which is Dodd-Frank is so enormous. The implications to the financial services industry are so broad that it has reaches in all parts of banks, insurance companies, and investment advisors. One of the things that Dodd-Frank means is, it means a compliance nightmare that there are, if we try to compare Dodd-Frank with (xxx), I am sure most every bodies most painfully aware off with only sixty pages long but Dodd-Frank is eight hundred and forty nine pages long and so that is the framework, the skeleton for role-making and studies of which we've been seeing decision coming out, rules coming out for the last four years. And so, it has compliance issues with respect to dealing with your costumers that has compliance issues with respect to dealing with regulators and it’s intended to make our financial markets safer.
Palmer: Given the enormity of it. What kind of changes does this mean for organizational processes, and in particular does it require segmenting and encapsulating parts of the business or is it something that would be approach more holistically?
Kramer: Well I think that historically many of the financial service industry participants have done a lot of their tracking if we will in segments and one of the issues now is that with real time obligations for reporting and in many situations plus the need to report transactions to the regulators, the need to have a sense of what is happening at the organization, from the organizational stand point becomes much more important.
Palmer: So, is it really about business transformation or is it more about a detailed incremental changes at the process level?
Kramer: I think that if point to depend on the institution and what their appetite for changes but it could very well be transformational and in some regards. For example, in dealing with costumers or clients who are using the financial markets of their training and in the markets, the banks or the securities from commodities firm to deal with them have obligations for reporting real time and nobody has been set up to do these. And so, it requires enormous investment in systems. You will also then has your own internal risk management and record keeping reporting as well. What we are seeing is, in my working with my clients, a team of some employees and consultants who are rolling up their sleeves and are really working very hard. The issue is to what you do about from the transformational side, one of the biggest issues that we have is that the rules themselves are coming out "peace meal" and so people don't have the opportunity to step back and think about how the rules could affect them, there just working as fast as they can to meet various compliance deadlines.
Palmer: You know that was really interesting point. I think that is one that's really misunderstood. There's a notion that it's not all there, that the rules are coming out incrementally. How has is that changed the way that these organizations manage the risk?
Kramer: Part of it is that if you don’t have a big piece of the rule making finalize, there is a reluctance to try to get up a speed to comply because you don't want to be following a proposed rules that can change. And so what we had was, Dodd-Frank has been on the books now for four years and the very first year what happened is nobody wanted to do anything because they wanted to see what the rules for. And some of the key rules, some of the real rules that turn the whole system on didn't, weren't even proposed for two years. And so now in the fourth year were the point was just everybody knows what they need to do and what they should have been doing. But the real challenge is not wanting to make an investment in a system that turns out you have to change what you thought you going to do. So we still have about a sort of the rules, part of the rules in some areas that has not even proposed at.
Palmer: Does it require change in the resources, processes that are being applied to risk management?
Kramer: Well I think that it is requiring a much bigger investment and if we're talking about complying with what the regulators are expecting from the financial institutions then, yes. But it is also working with their costumers too, because now the costumers have a sense of what it is that they're suppose to be receiving from these institutions whether its real time information or an boarding process that is (most) and air free and with all the additional obligations that makes all of that harder to meet.
Palmer: One thing that always amazes me when I hear from even larger organizations and the financial and (trans) arena but more and more from mid-size organizations that they're just beginning the process of documenting, capturing and understanding their processes. You would think that something that has been long since the accomplish but in many cases are really as a green field. Is that out of window now? Can they get away with that any longer?
Kramer: I guess it depends on the size of the business and the sorts of regulatory requirements that they have because the financial markets, different institutions are going to be affected in different ways. So for example, we're see enormously change for banks and for trading companies. We are seeing, last of that with respect to the insurance side, unless we are talking about insurance companies that are hedging their assets to their liabilities. And so, we saved big shifts on how they're managing their portfolios. So, it really depends on the industry and the regulators that have their (xxx) what those organizations are supposed to do.
Palmer: Can these ultimately be a benefit for the organization, is a necessarily a burden or you see they're approaching in a way that these can be a leverage point?
Kramer: I really think that these can be an enormous opportunity for the financial service companies. And the reason for that is you're going to be, there are such enormous competitions to get and reach the high end clients and costumers, the high net (worst/worth) segment of the industry and private clients, costumers are very very particular. And they care very much about smooth on boarding and we just look for an example to the mortgage lending side with the new and increase rules on what more mortgages can look like we're seeing a just a drag on, actually getting more mortgages put in place. We're seeing a drag on, and all sort of things and so the opportunity for an organization is to apply BPM to making sure they are going to be doing their processes and getting their clients on boarded faster. That's where the money is going to be and so I think it is really an opportunity, although it certainly has a lot of drawbacks and things that can be viewed as very negative.
Palmer: And at the outside you talked about the difference between (xxx) and Dodd-Frank. In terms of the enormity of that and nothing else just that we share difference in paper way.
Palmer: If you would think that we've been down this road before, there few industries that out there that as regulated as making financial insurance, but this are in many ways new territory. Can you talk a little about that why this is different to the regulations that these industries has faced in the past?
Kramer: Well I think that enormity of it is you can't even imagine at based on the share paper way. It is clear with part of it but just if we think about what's (xxx) with it, with sixteen rule making six studies. So (xxx) where people were working these around the clock and wringing their hands with sixteen rule making six studies, Dodd-Frank is two hundred and forty rule making and about seventy studies. And so what is this do is that it crops up and waste the people don't expect. So that (xxx) sixteen titles and each one of the title is really stand alone different material. And so, it could affect these businesses, it could affect their credit card, their gift card, it can affect the products that they buy, for example if we just look outside into the manufacturing the conflict mineral, where did they get the gold that put on their products or some of the other materials that are used. What are they have to report to the (FEC), who can borrow money? How they treat their officers and directors, what about their executive’s compensations. Many of these issues are driven by Dodd-Frank in a way that makes it just so (manna) that it catches so many parts of these businesses.
Palmer: So really it's not just they the top level, immediate transactional issues, it's really the downstream activities and need of transparency into the supporting activities that is so critical.
Kramer: Yes, absolutely.
Palmer: So, you mentioned that there are still a third of the rules that haven't been implemented, but in general, what’s next?
Kramer: Well I think that what's next is the skeleton is now been built and you know the muscles and (tendons) are on it. I think that in many industries now they're going to be able to precede forward knowing that there are some key rules that are still missing but the bulk of the enabling rule, so once really tell you how to run your business, most of those has been either finalized or proposed. And so with that, it just means that they have obligations to keep an eye on what is happening. This is an area where every day something new comes out. Today I think, just last week some new proposals from the Federal Reserve Board on their credit practices, unfair credit practices. The Consumer Finance Protection Bureau, another sort of trial Dodd-Frank, a finalized provisions to their international money transfer rules and so everyday there is something new and that's really the challenge for businesses so stand on top of the changes.
Palmer: And I would imagine to implement them and to expand on that thought. You have operational processes that are in-placed and you have new rules that are coming in. So it’s not a manner simply being prepared to deal with the rules that are in placed but being able to adapt quickly as these new rules coming to play or it also evenly the interpretations of these rules.
Kramer: It's both, because the systems are not in-placed. And the because taxing are not that these organizations did not to track before. It is an enormous extent. So they want to get it right and they want to be making sure that it both meets the needs of the regulators but also meets their business needs. In so, what I have seen is that their differences of opinions of what's end and what's out of that Dodd-Frank, what percentage, certain definitions or falls out of them. And so it requires interpretations as well but it definitely requires an enormous focus on systems and getting your processes is efficient as possible.
Palmer: And following the financial crisis of 2008 which gives rise to Dodd-Frank, we saw a total change of the landscape of banking, financial and insurance institutions. Through (MNA), though it didn't survive. Now, given these systems burden, do you see that continuing, simply to keep up with the regulations burden?
Kramer: Well, you've raised really an important point Nathaniel because what's happened is, if we look at community bank for example, many community banks are finding that they just can't implement that (Frank) in a close decision timely manner. So we are seeing mergers restructuring, some of the mergers are shutting their doors. And so there's a big movement now in merger's acquisitions, restructuring and trying to figure out how to perform your regulatory obligations and at the same time as running your business efficiently and profitably.
Palmer: And back in the pre (melt) down era, we saw (MNA) driven by buying best practices and in processes. That something that we have in our (xxx) being a BPM-focused organizations. We're looking for where business process as an asset, really as pronounce in business activity. Are you seeing that as part of this move or is it simply a manner of (xxx) keep up that they are (xxx)
Kramer: Well I think that there some, I think it's a really a combination because again it depends on whether you look at whether it is an opportunity. If you look at the Dodd-Frank, and the BPM compliance obligations is an obligations burden or if you look at it as an opportunity and I think that the organizations that are faster, able to do things quicker who has BPM in placed and just need to be (bolting on) more of it if you will, in more processes and in different business line or areas like that, it's going to make a big difference .
Palmer: And for those organizations particularly the community banks that the regional banking systems, what advice would you give them today when comes to BPM?
Kramer: I would say that for those who have not made the investment, it's time to do so and for those who that feel that the investment is too great than that they may be thinking about being the next merger candidate or having a restructuring. Because I think that we just seeing the change in the people/organization who are able to play in a Dodd-Frank, post Dodd-Frank environment are really the ones that can meet the obligations that are imposed in on them from all of the different reaches and touches of Dodd-Frank and so they really do need to have a BPM structure in place.
Palmer: Great. Andrea, thank you very much for joining us today.
Kramer: Well thank you very much and I look forward to participating in the conference.
Palmer: Thank you for tuning in, I hope you will join us later this month, September 29 to October 2 at BPM in Banking, Finance and Insurance in Chicago. Thank you.
Kramer: Thank you very much.