The role of Front Office Supervision is now seen by regulators and market participants alike as a critical element in ensuring effective oversight of firms’ risk exposures and protecting them against the operational and conduct risk events of the recent past. Experienced supervisors may recall a time when their responsibilities centred on overseeing their desk’s P&L and market risk limits, but across the financial services industry there has been a formidable growth in supervisory responsibilities which continues to drive changes of supervision frameworks.
It is a constant challenge for businesses to ensure they are meeting regulatory expectations while managing cost and not placing too heavy a burden on supervisors, but at leading firms, effectiveness and efficiency go hand in hand.
Drivers of change
- Increased regulatory expectations – Firms are expected to maintain inventories of supervisory controls across an ever wider array of topics including unauthorised trading, market manipulation, fair customer outcomes, fraud etc. The performance of these controls is expected to be formalised and evidenced, including the investigation and resolution of identified exceptions.
- Ineffective structures – Broader supervisory responsibilities have led to a huge increase in the number of tasks assigned to supervisors. Often the MI required to perform these tasks is inadequate and stored in disparate systems, which results in these tasks being little more than a box-ticking exercise. At the same time, ineffective escalation channels and governance arrangements limit senior management’s ability to provide oversight. Under the UK’s Senior Management and Certification Regime (SMCR), this calls into question senior managers’ ability to discharge their regulatory responsibilities and increases the pressure to reshape Front Office Supervision.
- Cost and efficiency – Streamlining supervisory frameworks and the way individual controls are performed has arisen as a business priority for many institutions. Some have witnessed a huge increase in the cost of Front Office Supervision as they have recruited specialised staff to support supervisors. For others the supervisory burden has become unsustainable as the sheer volume of tasks reduces the capacity of supervisors to give adequate focus to high risk items and perform their other business duties. The quest for an efficient supervision is leading to technology changes.
- Expanded scope – Although the working-from-home and hybrid working conditions enforced by the pandemic have largely dissipated in the front office, the challenge of supervising global teams with employees in remote locations persists. At the same time new communication tools have emerged, leading to challenges in monitoring and maintaining records of business communications. Firms that have not adapted to these conditions have been targeted in recent regulatory actions.
- Developments in artificial intelligence – The emergence of AI and new tools will have an immeasurable and rapid impact on business functions and supervision. AI has the potential to bring supervision to the next level by interpreting vast datasets, including real-time data, to find patterns and outliers. These insights will derive meaningful signals for supervisors to dramatically increase efficiency.
How are firms reacting?
Firms are at varying stages of maturity in their response to these challenges.
The least mature businesses are still struggling to develop frameworks that bring them in line with regulatory expectations. Front Office Supervision at these organisations remains limited in scope, with unclear roles and responsibilities, an over reliance on manual processes and tools, and difficulty in managing the integrity of the supervisory hierarchy (e.g. trading books not mapped to supervisors, inappropriate supervisory spans of control).
However, many firms have solved for these problems and have developed frameworks they can explain and justify to regulators.
Operating models at larger firms now often include ‘Line 1.5’ Business Control Officers who perform controls and tasks that were previously owned by supervisors, and in some cases by the second line. The mandate of these teams includes clear delegation arrangements such that accountability remains with the business, and escalation routes into senior management. Where a large amount of data processing is necessary, this has moved to a “utility service”, usually offshore or sometimes externally, and the output data can then be tailored and used across both first and second lines. Duplication is removed and information is shared effectively across the organisation. This change of operating model ultimately re-anchors risk ownership in the first line.
Most organisations have implemented workflow tools to bring consistency to supervisory processes. Supervisory tasks are automatically allocated, information is made available to all in tailored dashboards, the workflow makes it easier to escalate and track actions, and the performance of supervision can finally be evidenced. Control functions also use these tools to monitor completion rates of tasks and report to senior management. Although these tools have increased efficiency in the front office, gains will not be fully realised unless accompanied by a rationalisation of supervisory tasks and the provision of actionable data. The digital transformation journey is not finished, and efforts continue to bring relevant data and alert management processes into a single accessible location and to reduce the number of tasks.
Tangible achievements have been made to improve the quality and integrity of source data, collect data centrally and streamline reporting, yet firms struggle to sort the truly meaningful MI from the large amounts of available data. Often the data that is easiest to collect is of the lowest value (e.g. late trainings or overdue tasks) whereas the most useful information is very challenging to obtain (e.g. trends in trading behaviour that are suggestive of poor conduct even if no single case is a flagrant breach). This problem can be addressed by ensuring a skilled person interprets the data before it reaches a supervisor or governance forum to focus discussions and decision-making on high risk items. Better MI supports better supervision and by extension better governance at firm level.
Finally, supervisory structures need to be supported by a sound governance. To make supervision real, firms have set clear expectations of what is required and embedded them in performance goals. Detailed guidelines and training are being deployed to assist supervisors in their daily tasks. Leading organisations are putting in place checks and controls to assess the performance of supervisors in order to identify areas of weakness and improve effectiveness. In brief, supervision has become a cardinal point for senior management oversight.
The most mature institutions have developed frameworks that align with regulatory expectations while also increasing the efficiency of supervisory processes and reducing the supervisory burden. Their frameworks are characterised by an enhanced operating model, the availability of precise and meaningful MI to enable supervisors to complete tasks, well calibrated Key Risk Indicators to facilitate decision-making at appropriate governance fora, and streamlined controls.
Overall, this shift in operating model, tools and data puts the front office supervisor back in the driving seat as they spend less time on low value tasks, receive more meaningful information from the firm’s internal data and can therefore focus on high risk items and signals.
Effective supervision places more emphasis on ‘preventative’ controls, which both enables firms to mitigate risks before they crystallise and saves on the effort required to detect, investigate and resolve incidents. There is no trade-off between effectiveness and efficiency, rather they are mutually supportive.
Implication of changes and areas for support
Based on our understanding of regulatory expectations and deep knowledge of peer practices, KPMG supports major financial firms in their journey to transform their supervisory frameworks, including:
- Diagnostics support to identify gaps in supervisory processes and controls against regulatory obligations
- Benchmarking the maturity of Front Office Supervision against peers and best practices
- Achieving maximum rationalisation and optimisation of supervisory tasks
- Review of supervisory technology and prioritisation of enhancements
