Potential disaster connected to a weak governance of new products

By Luciano Fantin.

This article deals with the time bomb hidden in the organizations every time a new product is launched without proper attention to the governance surrounding this pivotal initiative.

One phrase that is commonly heard in financial institutions by the Back Office personnel and/or Accounting is “the guys at the Front Office just fill in the deal ticket with something new and send it to us, and we have to live with it..” . We know that for many years, especially in the case of smaller institutions, the aforementioned phrase represented quite adequately the reality. However there is no room anymore for this under the current regulatory environment. With the growing scrutiny of the regulators on controls and processes of financial institutions it is unthinkable nowadays to “just send the deal ticket to the Back”.

The amount of derived reporting at month and year-end books closing is very large and systems not always have the necessary built-in intelligence nor possess sufficient granularity for the correct information handling. Besides this, on top of the common reporting packages it is not rare that the Central Bank makes specific questions when analyzing balance fluctuations.

The great quantity of peculiarities that exist in the Brazilian market, as regards to the diversified range of products and regulatory volatility makes things more complex for a sound regulatory compliance. Opposed to developed markets where not frequently new products appear and rules tend to change more rarely with proper time for compliance, in Brazil the situation is very different. That is why it is so important to have a sound adherence to governance practices which chiefly involve common sense.

Everyone knows that some times a system customization may not pay-off under a cost benefit analysis, when launching a new product that is not yet proven to be economically interesting, mainly when there is a great deal of uncertainty surrounding the pay back time. It should not be seen as wrong to adopt a step-by-step approach, i.e. to opt for such investments when the mentioned uncertainty has been reduced by e.g. some pilot deals. Notwithstanding it is key that all relevant areas are duly involved, following a proper method and with a clear formalization, before facing the market. The hidden impacts that a new product can generate, sometimes only known by those experts at the Back can be devastating and all involved risks should be adequately debated beforehand.

The solution to reduce the risk of such impacts is not complex and does not demand relevant investments. It follows some cultural and process change by internal stakeholders who should be educated on a more robust governance surrounding new products. The derived gains cannot be properly gauged but are undoubtedly very relevant. It is known that even well structured organizations which present high control and methodology standards sometimes suffer from unexpected errors, which lead to significant financial and image losses.

SP April 2013.

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