Managing Costs Related to Increasing Banking RegulationAs compliance costs continue to grow, banks can figure out ways to rein them in such that efficiencies are also enhanced.

Executive SummaryMany large banks reported disappointing earnings in 2014. Among the contributors to higher costs were the expenses associated with increased regulatory activity.

Investigations and efforts to comply with new regulations can weigh heavily on the bottom line. Discovery, document review, revamping agreements and training staff require a signifi-cant investment of resources.

For example, in the last few years banks have agreed to pay billions of dollars in fines for issues ranging from conducting business with countries sanctioned by the United States to manipulating interest and currency rates. It is clear that regula-tors are closely tracking the banks on most issues.

Deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs) make for additional stress on banks from regulators. In December 2014, Standard Chartered PLC announced that it had agreed to a three-year extension of the DPA it entered into in December 2012 with the U.S. Department of Justice and the New York County District Attorney’s Office.1

The bank has agreed to retain a monitor to evaluate and make recommendations about its sanctions compliance program. According to

Standard Chartered, the agreement acknowledg-es that the bank has taken a number of steps to enhance and optimize its sanctions compliance. These include implementing more rigorous U.S. sanctions policies and procedures, training staff, hiring senior legal and financial crime compliance staff and implementing additional measures to block payment instructions for countries subject to U.S. sanctions laws and regulations.

Many other banks also had to undertake such efforts. Despite an often challenging regulatory and legal environment in 2014, banks must prepare themselves for ongoing activity in 2015 that will continue to add to costs.

This continuing emphasis on reforms will add to internal pressure from the C suite and sharehold-ers to control costs in 2015.

Legal departments will need to identify ways to save money on current investigations and litigation, prepare for new regulations such as the Federal Reserve Board’s recovery and resolution guidance and proactively manage compliance to minimize the chances of penalties.

As this white paper points out, alternative legal services, such as a legal process services provider, offer a way to quickly staff and accomplish these goals and initiatives.

cognizant 20-20 insights | june 2015

• Cognizant 20-20 Insights

cognizant 20-20 insights 2

Ways to Utilize Legal Process ServicesFor banks with an eye on both regulatory concerns and the bottom line, legal process services providers can play a variety of roles. Banks can consider legal process services in any or all of the following areas:

• Management of information systems: Regu-lators are requiring more and more visibility into contractual data that is housed in a man-agement information system. One example of such regulation is the Federal Reserve’s recovery and resolution mandate. In January 2014, the Federal Reserve issued SR Letter 12-17/CA 12-14 and related communications, which outlined the need for eight large U.S. banks to be prepared with certain key informa-tion from contracts and legal documents in the event of instability at the bank. The deadline has been set for December 2016.

Such a project requires large groups of attorneys and paraprofessionals to review contracts and upload them to a searchable repository. Banks that decide to tackle this internally will have to hire large numbers of paid staff members. Using law firms will also be an expensive proposition. On the other hand, an experienced legal process services provider can offer reasonable costs, high quality and hands-on management to complete the project. The provider can partner with the bank to structure the right solution.

Banks should consider reaping other benefits from their efforts around recovery and resolution guidance. They may also want to have legal service providers simultaneously develop capabilities to search for other terms from a business perspective.

• ISDA review/collateral management: Under the requirements of the Dodd-Frank Act, the documentation around ISDAs can present significant risks. Banks must develop solid document management systems to remain in compliance and effectively manage inter-nal and external investigations. Among the record-keeping requirements, banks need to retain ISDA master agreements, CSAs, relevant amendments and confirmations, in electronic form, for swap transactions in existence on or after April 25, 2011; retain relevant agreements through the life of a relevant swap and for five years after the swap terminates; and swap deal-ers must retain relevant records in an electroni-

cally accessible form for counterparties, which must be accessible within three business days.

By using legal process services providers, banks can organize their contracts and other information to comply with their reporting obligations, as well as make data available for investigations and business purposes.

• eDiscovery and document review: Regardless of current or future cost pressures, eDiscovery and document review are often at the top of the list when discussions turn to cost savings and legal process service providers.

Even matters that are ultimately settled can cost millions in discovery expenses. This is an area where banks can realize significant savings by working with a third-party provider, for the short as well as the long term.

Choosing the right provider is important. Many providers are primarily focused on discovery and document review, and lack capabilities beyond litigation support. Banks looking to hire legal process services providers should consider partnering with specialty companies that have a broader reach and range.

• Creating new corporate entities: When banks need to establish new corporate entities, such as a U.S. bank holding company for a foreign bank organization (FBO), new contracts may need to be generated or existing agreements may require amendments to account for the new entity. Much of this administrative work can be performed by a third-party service provider, since it is often not a good use of in-house counsel’s time to manage such routine activities.

3

Five Ways to Manage Costs Amid Changing Regulations Banks looking to manage the costs and pressures of growing regulations should consider five steps:

• Earlier is better. A proactive approach will help minimize expenses, stress and risk. The legal and compliance departments are often the first to learn of regulatory changes, pending litigation and investigations, and planning a response and course of action should occur as soon as possible. This should include consulting with key stakeholders right away. Getting input and sign-off early on will help ensure that the process is as smooth and thorough as possible.

• Ramp up with experienced legal process services. The banking industry is complex and changes quickly. It is therefore important to work with providers that understand both the banking industry and the regulatory mandates. Many legal process services providers are niche players, often with limited resources and a short history in the legal sphere. Others may lack an established track record. Banks should look for stable, known entities that can ramp up as required to sustain operations.

• Understand and streamline the scope of the work. Quickly understanding the scope of work is one of the most challenging aspects of adapting to changing regulations and investi-gations. Once the legal or compliance team gets its arms around the scope, it is time to start streamlining processes and setting expec-tations.

• Establish sound processes to head off poten-tial issues. By establishing clear processes, banks can proactively address issues such as “know your client/know your customer” (KYC) and anti-money-laundering regulations. Federal regulators have made it clear that banks will be fined or face sanctions for violat-ing KYC regulations.

Federal prosecutors spent four years preparing a case against a Colombian cocaine cartel that allegedly laundered tens of millions of dollars through several major international banks. The investigation led to the seizure of more than $200 million and the confiscation of more than a ton of cocaine.2

• Be flexible. While banks need to plan ahead, they also need to continually assess the balance and load of their projects and goals.

Looking AheadBanks are under extraordinary pressure from shareholders as well as regulators. Reining in legal costs through the use of legal process ser-vices will strengthen compliance measures and minimize risk.

By identifying areas of concern and partnering with the right legal process services provider, banks can be better positioned to deal with changing regulations this year – and beyond.

Footnotes1 https://www.sc.com/en/news-and-media/news/global/2014-12-09-Extension-of-the-Deferred-Prosecution-

Agreements.html.

2 http://www.acfcs.org/financial-crime-wave-morgan-stanley-fined-for-kyc-gaps-corruption-crackdown-in-china-continues-and/.

About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world’s leading companies build stronger busi-nesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfac-tion, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 100 development and delivery centers worldwide and approximately 217,700 employees as of March 31, 2015, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

World Headquarters500 Frank W. Burr Blvd.Teaneck, NJ 07666 USAPhone: +1 201 801 0233Fax: +1 201 801 0243Toll Free: +1 888 937 3277Email: inquiry@cognizant.com

European Headquarters1 Kingdom StreetPaddington CentralLondon W2 6BDPhone: +44 (0) 20 7297 7600Fax: +44 (0) 20 7121 0102Email: infouk@cognizant.com

India Operations Headquarters#5/535, Old Mahabalipuram RoadOkkiyam Pettai, ThoraipakkamChennai, 600 096 IndiaPhone: +91 (0) 44 4209 6000Fax: +91 (0) 44 4209 6060Email: inquiryindia@cognizant.com

© Copyright 2015, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.

About the AuthorsRohan Sukhdeo is Associate General Counsel and Head of Cognizant’s Legal Process Services (LPS) Practice. As head of LPS, he leads all LPS business development efforts in the U.S. and comanages the overall development of Cognizant’s LPS Practice globally. He can be reached at Rohan.Sukhdeo@cognizant.com.

Michael Kreiner is an attorney and leads client services and business development for Cognizant’s Legal Process Services (LPS) Practice. He is a member of the Association of Corporate Counsel (New York) and the New York State Bar Association. He received his J.D. degree from Fordham University School of Law and his B.A. from Union College. Michael is admitted to practice in New York. He can be reached at Michael.Kreiner@cognizant.com.

Codex 1347