Traditional product control is no match for regulatory pressure

Georges Bory |
September 10, 2012

With poor product control cited as a factor in the 2008 fall of Lehman Brothers, it’s no surprise that over the past few years the spotlight has been shining on this element of trading activity. Today, banks face ever increasing scrutiny from regulatory bodies, with the result that the product control function is now expected to address a widening range of issues. When the financial crisis kicked off, the FSA outlined key concerns about failings in the area of valuations and product control in its ’Dear CEO’ letter. Consequently, product control is now being recognised as playing a central role in the end-to-end trading process.
While this is broadly good news, greater investment in improved tools and processes is needed if product control is to realise its potential and meet these demands.

Recent research from Investance shows that product control functions now need to demonstrate greater efficiency and responsibility than ever before. Investance identifies a trend towards product control being utilised as a stronger junction role between the business, risk and finance. Therefore, the function is expected to go beyond its traditional boundaries to tackle wider issues, such as the analysis of liquidity constraints or independent price verification. Many now expect product control to play new roles, such as challenging the front office or supporting finance in assuming general ledger ownership.
Consequently, product control processes need to evolve in order to meet an emerging need for end-to-end consistency and cross-functional assurance. This has a significant impact on the IT systems and applications that product controllers have traditionally relied on, with the result that older technology simply cannot cope with new demands. Unsurprisingly, financial institutions are now suffering from the consequences of a historical lack of IT investment in the systems needed to support product control effectively. A number of product control processes are still very manually-intensive, a situation which increases operational costs and risks. In addition, many systems are heterogeneous (for instance spreadsheets) and siloed, creating consolidation and consistency issues.
Combined, these issues mean that product control is now expected to answer issues that have simply not been addressed before. If investment banks don’t step up to the mark and invest in more effective technology, they will find themselves left behind in the race to take advantage of the advanced insights modern product control can offer.

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