Investing in Turkey: Mutlu Sencan, Smart Regulation – Facilitating Growth

Smart regulation – facilitating growth in an era of increasing supervisionin financial services

Mutlu Sencan, Director

EY Turkey, AdvisoryLondon, March 18th, 2015

Investing in Turkeyand the GrowingEconomyMiddle East Association

Smart regulation – facilitating growth in an era of increasing supervision in financial servicesSlide 2

Financial Services Industry RegulationsRisks regulators bother in financial sector

Risk Universe

AML andcriminalusage

Inappropriatefinancialreporting

Taxevasion

Compliance

with laws

Fraud

CapitalLoss

Investorrights

Safety of

financial

institutions

Failures in economy

Collapseof banks

Relationshipwith

other sectors

Stability

of financial

system

Protection ofconsumers

Protection ofdepositors

Continuity ofbusiness life

Confidentiality

Public

benefit


Financial Services Industry RegulationsRegulatory response to those risks

• Capital adequacy

• Liquidity adequacy

• Equity

• Risk measurement

• ICAAP

• Basel

• Deposit and loans, credit cards

• Consumer protection

• Anti-money laundering and

sanctions

• Data privacy

• Capital markets reform

• BoD and the management

• Internal control system

• Risk management system

• Internal audit system

• Management of business

and IT processes

• Business continuity

• Chart of accounts, accounting

policies and reserve requirements

• Financial reporting

• Tax

• Independent audit

Regulation


Financial Services IndustryReal cases the regulations try to prevent

Bankruptcy of a 233 years old bank with $ 1,3 billion loss

► Absence of oversight

► Lack of an effective internal control system

► Unauthorized transactions of a trader

Internal control weakness of a global bank: $ 7,2 billion loss

► Unauthorized and fictitious transactions of a trader

► Lack of effective internal controls for transactions and monitoring

Sanctions violations of a global bank: $ 964 million fine

► Weakness in governance and compliance

► Deficient risk management policies and procedures

► Use of nontransparent payment methods


Financial Services IndustryReal cases the regulations try to prevent

The Financial Crisis

► Lots of banks were erased from the earth, funded to rescue or sold to another

► Lots of companies went bankrupt

AML regulations violation of a global bank: $ 1,9 billion fine

► Deficient risk management policies and procedures

► Inadequate internal control system and monitoring of transactions

Sanctions violations of a global bank: $ 619 million fine

► Weak governance structure

► Insufficient oversight and procedures

► Failure to establish effective payment screening

► Weak compliance training programmes


Financial Services IndustryChallanges to grow in demanding supervision

High number of

customers

High volume of

transactions

1

2

3

45

6

7

8

Money is the product,

moving fast irrespective of

geography with everyday

changing price

Dependent highly on information

systems where intangible product is

stored and transported

Dependent highly on

many people working

in many locations

Buy or sell products

irrespective of geographies

and locations

Vulnerable to fraud,

financial crime and errors

resulting in fast and

material money loss

Lots of stakeholders to

deal with


Financial Services IndustryOvercoming the issues for sustainable growth

► Survey participants: 52 banks across 27

countries

Culture

► High-profile conduct failings have increased

board and management attention to culture.

Globally, 66% of banks are changing their

culture, for the global systemically important

banks (GSIBs), it is 84%.

► Only 38% say that individual behavior is

significantly reflected in career progression,

and only 30% believe it is fully understood that

negative behavior will be penalized despite

earnings performance.

► 56% say that achieving balance between front-

office behavior and risk culture is their top

challenge.



Board oversight

► 70% of banks are struggling to link risk

appetite to business decisions;

there has been more success in linking

strategy to risk appetite.

► Banks are adding risk, regulation and banking

expertise to boards.

► Boards and senior management, concerned

about conduct failings, are changing

governance in a number of ways:

► adding new committees to oversee conduct

► changing processes and policies to ensure that

the front office is truly accountable for all risk

► 77% of banks now have a wider range of

committees, beyond ALCO, focusing on

strategy as well as conduct risk.



IT and internal controls

► Data and systems are the most significant

challenges to internal risk transparency, cited

by about 85% of banks.

► Major programs are underway to enhance data

and systems, most banks having seen 70-80%

increases in IT spend in the past year.

► Banks are responding with strengthening

compliance, making business units responsible

and conducting reviews of controls. The

industry is starting to look at conduct and

compliance as a risk type.



Key

Take

Aways

Balancing sales

behaviour and risk culture

Increase Board

effectiveness and

expertise inc. Board

committeesDeliver greater transparency

and accountability

at all levels in the

organization

Improve the overall

alignment of risk with

corporate goals

Clarify and strengthen risk

oversight at the Board and

executive management

levels

More automated and

preventive controls

Reduce cost of controls

spend, optimize controls

Monitor critical controls and

KPIs continuously to improve

decision-making and

performance results

Thanks

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