Time struggle for Financial Risk Management

Treasury departments in the Netherlands continue to struggle with a mismatch between what they do in practice and what they ideally want to do. At the same time, a number of major trends coming their way will change the face of the face of the treasury landscape, forcing an adjustment across the board.

According to a joint study by management consultancy Enigma Consulting and Rabobank, conducted among treasurers and other players in the treasury landscape (financial directors, cash managers, controllers, etc.), treasury teams are spending most of their time on Cash Management. Across the board, 66% of respondents indicated that Cash Management is their most time-consuming activity. In second place is Forecasting and Planning, on which 50% of respondents spend the most of their time. Next, with around a third of responses, was Accounting and Reporting, followed by FX Management/Money market tasks in fourth place. 

Analysis of the data shows however that the priorities are not in sync with strategic goals. Asked which activities treasury departments would like to work on, 70% of the respondents indicated that they would prefer to spend most of their time on Forecasting and Planning. In reality, only 50% of the respondents spend most of their time on this task – a discrepancy of 20%. An even more striking result was found for Financial Risk Management: 55% of those surveyed indicated that they would prefer Financial Risk Management (FRM) to be in their top-three activities, in contrast to the 20% of respondents who currently have FRM in this bracket.

The fact that a large chunk of respondents wish to increase their focus on FRM is no surprise, according to Wim Welters, a senior advisor at Enigma Consulting. Welters pointed out that the finding is consistent with previous surveys, with FRM at the top of survey results since the study’s launch three years ago.  

Typically, this is due to of a lack of time and the necessity to respond to the issues of the day, as well as the need to assuage stakeholders who push for different priorities, with FRM commonly left on the backburner. Welters, however, recommends that organisations pay greater attention to FRM, as, “by regular risk management, many potential risks and issues can be identified and avoided through the right analysis.”

Key aspects for getting more value from Financial Risk Management are putting a clear FRM policy in place, supported by dedicated staff and support from leadership. Further, a sound FRM system helps with avoiding financial damage, gaining better insight into risks and achieving more control of financials. 

Other areas where mismatches were found included Forecasting and Planning, which is one of the key steps for treasury departments in their development toward maturity. While risk management is traditionally used to look back, levering new technologies and artificial intelligence, treasuries can use advanced forecasting techniques to look forward and improve the way they control financial portfolios, such as assets or derivative positions.

Treasury centralisation

One trend highlighted in this year’s survey is the continuing spike in treasury centralisation. Centralisation occurred with 75% of organisations questioned in 2017, six percentage points higher than in 2016 (69%). Unsurprisingly, a high correlation is found between centralisation and companies with large systems in place such as an ERP, TMS, and trading systems. Welters: “These new technologies have acted as a trigger for centralisation, as the need for compartmentalisation is negated by digital processes with quicker turn around and higher accuracy levels.” Another correlation is found with companies which are planning or have realised a payment factory, for which centralisation is a precondition.

Compliance remains time consuming

In recent years new laws and regulations have continued to enter the world of treasury. In the survey, 45% treasurers indicated that they suffered from high to very high regulatory pressure. These changes are often demanding, with 70% saying that “more comprehensive knowledge is required due to the increased regulation.” 

The top three regulatory changes among treasurers are IFRS9 (19%), followed by Base Erosion Profit Shifting (BEPS; 18%) and US GAAP / IFRS leasing regulations (15%). The implementation of IFRS9 required from 1 January 2018 means that organisations are now implementing that particular procedure. Meanwhile, although BEPS is of fiscal origin, it can have a severe impact on the treasury function of international companies. And in the future, US GAAP/IFRS will see operational leases be no longer booked off balance as per 1 January 2019. On basis of the outcome of the Treasury Barometer survey, this is expected to mainly impact administrative processes within finance. 

One regulatory task for banks which is increasingly coming under the spotlights is KYT (Know Your Transaction), a step which sits after the more well-known Know Your Customer (KYC) check. KYT, which is part of the banks’ Anti-Money Laundering (AML) processes, requires institutions to scan both outgoing payments and incoming funds for potential relations with criminal behaviours. Payment orders or receipts to (from) entities that match EU sanctions run the risk of being frozen, while payments that do not meet the AML & Sanctions regulation will be refused. While KYC compliance in essence requires banks to only take one step (at account opening with monitoring), KYT is an activity which requires continuous attention. 

Treasurers are according to the findings becoming increasingly aware of the risks of AML. The failure to freeze or refuse funds when it should be done so can lead to a critical public outcry and often huge penalties by regulators. In the survey, 50% of the respondents said that banks should set up their own AML filtering to mitigate reputation damage. Some players in the landscape have therefore started to pre-screen their own transactions before sending them to the bank, by setting up their own AML filtering or integrating this into their accounts payable and accounts receivable procedures. 

“At Rabobank, we are observing an increase in so-called sanctions matches,” stated Gerda Mooij, a manager within the bank’s Global Compliance department and specialised in AML, in the Treasury Barometer report. One explanation could be that the number of entities on the sanctions lists has increased over the years, with sanctions on doing business in Russia the most notable example. However, enhancements in bank filtering systems have also played a role, meaning that Rabobank for example is better equipped to separate the wheat from the chaff in the first instance. 

She further pointed at the benefits of gaining deep knowledge of sanctions through discussions with sanctioned countries/territories (e.g. Crimea), and through understanding the business of the customer, including aspects such as geography and financial and supply flows.

Future financial landscape

According to the study, a new regulation which treasury has been insufficiently focusing on to date is PSD2 (Payment Services Directive 2); perhaps a major example of change which treasurers struggle to understand the direct impact of. Although 30% expect a high impact, most respondents (63%) cannot yet determine whether the impact of PSD2 on the future landscape will be significant. 

Likewise, the added value of PSD2 for the companies of the respondents is considered highly uncertain (71%). As respondents are not working with PSD2 yet, only 4% of those surveyed currently plan to shift their business from traditional banks to other parties (Payment Service Providers) due to the regulation.

The rise of Open Banking could provide more value-added services for treasurers, with more data being exchanged between corporate customer and the banks. Take, for example, contracts, remittance information, data intelligence and online real-time status information.

Welters confirms the struggle to understand the impact of PSD2 and Open Banking. “Although the outlook is promising, there are until today no ‘killer-apps’ introduced in the market. It could potentially lead to new connectivity model with banks, FinTechs and other financial service providers, but like with any new innovation, proven business propositions are required before treasurers will step in.” 

Meanwhile, respondents have faith in Blockchain technologies. Although the majority of survey participants have no opinion as yet, 38% of the respondents believe it will impact the future landscape and 23% said Blockchain will add value to their company.

In line with the growing uptake of technology among treasuries, there is also a heightened concern regarding cybersecurity. 50% of the study’s respondents agreed to the statement “Prevention of fraud/cybercrime is now part of my treasury function.” Focus on fraud/cybercrime is therefore likely to increase further in 2018, as the appetite for digital transformation across various industries continues its momentum. 

Raising the strategic value-added bar

Against the backdrop of change and the need to become more strategic, treasury departments face one common challenge; that they must do more but with the same resources. Most of the treasurers asked (64%) believe that the size of their team will remain stable during the coming years – despite the increasing workload thanks to regulatory requirements. This is perhaps in part due to strategies which now more heavily involve automated processes, which can help to pick up the slack. 

Either way, there still is long way to go. In 2017, only 35% said that they are able to fulfill their strategic role, while the majority (36%) considered the role to be neither specifically operational nor strategic, and another 29% indicated that they remain stuck in operational role. In spite of this, another study, by MMC, found that Treasury departments were increasingly being relied upon for strategic insight. 

The report by Enigma and Rabobank reaffirms earlier findings by MMC that, while changes in risks and opportunities are growing the need for a strategic approach – as geopolitical and technological developments usher in new business models, investment priorities and financial risks – strategic maturity for most treasury departments remains a distant prospect. While treasurers are being forced to raise the bar, they struggle against a backdrop of growing challenges and more scrutiny on efficiency.