15 minute read
regulation
The rise of regtech
Far from being a dull regulatory topic playing out in the background, regtech has become sexy as a result of the competitive advantage and reduced regulatory burden it can deliver across the financial sector. But who is driving its rise – and how much further can it go?
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Words:
David Burrows
THE WORLD OF regulatory compliance is reaping the benefits of using technology – and its adoption is, unexpectedly, being driven as much by the regulator as by forward-thinking firms.
Many firms still have legacy compliance processes that are manual and labourintensive, with high administrative overheads. Workflows are linear and iterative, and many teams still rely on email, Excel and PDF files to manage their compliance reporting. This creates siloed data with little status visibility.
Such lack of oversight, control and accountability leaves significant room for error. As a result, the adoption of solutions to create more efficient regulatory reporting is not just being driven by firms that recognise the time and cost savings, but also by the regulators themselves.
FUZZY LOGIC
Mark Le Page, Guernsey-based Director at risk advisory firm Kroll, accepts that regulators are playing an unexpected role in implementing technology. But he believes there remain additional concerns around the rise of tech.
“There is concern in the Financial Action Task Force (FATF), for example, that fuzzy logic – a historic mathematical concept recognising that truth and falsehood are rarely binary concepts – could lead to curious outcomes when programmed into machine learning regulatory tools,” he says.
“Similarly – and this is very much at the heart of what we do – regulators are concerned about the increased cybersecurity risks.”
Nevertheless, he believes that the impact of 9/11, and the recognition that terrorism could be financed with relatively small sums of money, brought an abrupt halt to the practice of only examining transactions over a certain value, even if it was not always recognised.
“Machine learning tools seek to ensure that all transactions effectively pass through a first net before human inspection of those that are unusual,” Le Page adds.
“Without that, in large-volume transactions, firms’ manual regulatory compliance would become unwieldy, particularly around countering the financing of terrorism.
“We have been supporting firms to refine their code to significantly reduce the number of alerts requiring manual intervention.”
QUICKER AND MORE ROBUST
Jonathan Wauton, Founding Partner and Chief Commercial Officer at Tiller Technologies, says regulators have now woken up to the fact that paper-based traditional processes are highly vulnerable and that they can increasingly be better served by technology.
Tiller has developed an automated digital address verification service, which works across many countries. All the customer needs to do is enter their address online and Tiller accesses regulatory level databases – utilities, credit bureaus, government sources – in the relevant country to match that customer to the stated address.
“This means the process is quicker, more robust and far less error-prone” he says. “For the ID document check, the customer uses an app to take a photo of their ID document. This is compared against a government-issued template to digitally test the authenticity of that document before using biometrics to match it to the person presenting it.
“Again, this is done in real time. Given the difference in the reliability, reduced risk ▼
of fraud and reduced cost, it’s no surprise that regulators are shifting their view on the use of this technology from ‘agnostic’ to ‘encouraging and favouring’.”
HIGH-GROWTH SECTOR
Adam Brown, Programme Manager at Jersey regulatory technology specialist Vaiie, points out that the regtech sector has been growing exponentially over the past few years. By 2026, it is predicted it will be a $204bn sector – up from $68bn today.
Brown believes this is being partly driven by the fact that as criminals develop increasingly sophisticated methods of avoiding detection, those trying to fight financial crime are facing an ever-growing challenge – and regtech can provide at least part of the solution.
“Regtech allows compliance officers to undertake more checks – and technology such as identity verification can undertake more checks than the human eye,” he says. “Regtech has the power to reduce firms’ costs and time, and turn their teams’ focus on only the most challenging problems.”
He adds: “The collaboration of regulators and these forward-thinking businesses to combat financial crime together will undoubtedly lead to further innovation, which is great news for the compliance world, the business world and regulators.”
As Dev Sian, a Director overseeing compliance tool MaxComply at IQ-EQ, explains, with an element of futureproofing, regtech can prevent the need to redo work that may be caused by human error, and avoids upsetting investors with repeated questions.
“One other negative outcome it helps overcome, besides steep regulatory fines for failings, is the ability to avoid reputational damage,” he says. “I shudder to think about how far-reaching and longlasting that can be.”
ACCOUNTABILITY RULES
Another issue that has heightened levels of attention on compliance within organisations is legislation being drafted in the UK and EU that will make individuals personally accountable for the compliance failings of firms.
Legislation in this space isn’t just being drafted, explains Sian. It is already being enforced – and penalties are already being applied. “As a senior manager, if you don’t choose to utilise the regtech tools available in the market, you’re putting your own neck on the line,” he says. “You are the risk.”
Sensible and appropriate options to mitigate risk are within reach. But just buying a solution does not mean businesses are safe from accountability.
“Senior managers leading significant functions need to demonstrate they have taken all reasonable steps and evidence it robustly. It’s important to find the right balance between systems and expert people to ensure ongoing compliance,” Sian says.
Le Page at Kroll thinks it’s a case of unintended consequences. “Company
law places boards responsible for the full operation of the company,” he says. “Making individuals – potentially and likely including non-board members – personally accountable for compliance failings would drive up compliance costs. Individuals would demand greater remuneration for their considerable additional risk and labour supply would fall as some resign, not liking the riskreward equation.”
Brown takes a similar line: “It is extremely important and well-intended. Many on-island directors and officers have liability insurance, so the concept isn’t new. But if the accountability goes too far, there is a risk that some may turn their back on the profession, which would be a regressive step.”
He adds: “This will certainly put pressure on organisations to ensure their processes are simple, straightforward and well-communicated to their compliance teams. And compliance team training will no doubt become even more intense. For regtech vendors, this could be a tipping point into greater regtech adoption.”
INVESTOR IMPACT
There is one other driver for growth in this sector, so another question remains: how far has, or will, the growth of regtech be driven by investor demand? Will investors put pressure on asset managers who don’t use regtech?
Sian at IQ-EQ suggests that the current surge in regtech is primarily being driven by investor demands. “Regtech allows firms to differentiate themselves from their peers to attract capital, as well as achieving the necessary compliance they need, which puts pressure on asset managers to make the shift to compliance software,” he explains.
Brown at Vaiie believes a business’s adoption of regtech isn’t just an indication of where it is now; it also demonstrates that the company is preparing for an evolving future – and that’s something investors are watching closely.
“We read all the time about activist investors, whether the subject is environmental, financial or technological. Boards understand this type of investor. Don’t neglect the silent investors. If they don’t feel engaged or the process is just too hard, they will go to a competitor. This risk is the slow attrition of clients that might not be realised until it is too late.”
“The time to invest is now,” says Brown, adding that the sector will start to see new firms, unbound by legacy systems, emerging with a highly adapted digital ecosystem.
“This will allow them to gain a competitive advantage and adapt to new and existing markets more quickly than those that have not yet invested in regtech,” he concludes. n
Surfing the wave of digital onboarding
Digital onboarding remains one of the most critical and evolving areas of regtech. And the area is expected to accelerate in the next few years. So, just how valuable is the transition into digitised onboarding and, beyond that, into digital compliance?
Jonathan Wauton, Founding Partner and Chief Commercial Officer at Tiller Technologies, says it’s clear that the use of digital onboarding has already reached the tipping point, and it is now regarded as a hygiene factor.
“It has become so commonplace that businesses that don’t have it will begin to look old fashioned and difficult to deal with,” he says. “From the customer’s perspective, they just won’t put up with having to send in physical copies of documents – and then having to wait. They are used to digital immediacy and convenience.”
Adam Brown, Programme Manager at Vaiie, agrees that the transition is incredibly valuable. “Most of us already transact in a digitised world, and we expect the businesses we interact with to be doing the same. When they don’t, it is incredibly frustrating. We are currently experiencing a convergence of technology and financial services, which will lead to product and service innovation built from a digital-first perspective.”
As an example, he points to utility bills that have long been an acceptable standard of address verification but, due to their ease of forgery, may not be in the longer term. “I see the future of digital compliance as using digital solutions throughout customer onboarding to significantly improve accuracy, efficiency and costs,” Brown continues.
“For example, products such as Vaiie Locate provide an alternative to the traditional address verification process by using authentication technology to securely authenticate individuals using geolocation.”
Kroll Director Mark Le Page argues that from a compliance perspective, the ability to have all onboarding immediately loaded on to a single system, from which ongoing compliance monitoring can occur, is critical to an efficient and effective business.
“Efficient in terms of cost savings from a unitary system; effective in terms of no loss – or unintentional hiding – of information that is crucial to an ongoing assessment of the relationship risk and unusual transactions,” he says.
how to Achieve a data-driven culture
Mark Stone, Senior Manager, Advisory at KPMG in the Crown Dependencies, discusses the tools and skills required to succeed in this increasingly data-driven world
IN 2021, IT was found that 74 zettabytes (74 billion gigabites) of data had been generated globally, with 90% of the data in existence created in the previous two years. This is a trend showing no indications of slowing down.
Data is certainly king when it comes to being a successful organisation in the digital era. Organisations with a solid datacentred strategy in place have a significant advantage as businesses increasingly recognise the importance of giving employees the tools and skills they need to turn data into insights.
Equipped with timely and accurate information, teams can adapt to the changing business landscape, delivering better client experiences and ultimately driving business growth.
The benefits range from optimising business processes and regulatory compliance to understanding customers more deeply than ever.
So, it’s not surprising that building a data-driven culture is at the top of the agenda for most organisations. But how do you successfully create one?
Having a good data-driven strategy is important, but creating a data-driven culture is more about transforming behaviours and mindsets regarding the importance of data. And this needs to start at the very top of an organisation.
CHANGE STARTS WITH BEHAVIOURS
Change projects fail when the data and related technologies are identified, procured and implemented but the underlying business case and desired benefits were not clearly communicated to the end users. This will always reduce the effectiveness of any project.
This is mitigated by ensuring the business is proportionately represented and actively engaged with any proposed change programme.
Taking users on the journey rather than enforcing change on them will lead to a significant increase in engagement with any new solutions. It will drive organisational acceptance by instilling confidence in employees’ ability to affect business outcomes through data-informed decision-making.
Planning is vital. Before undertaking any change projects: • Identify critical problems and pain points • Clearly define the expected outcomes of any proposed change • Don’t simply buy a solution and think it will be adopted • Emphasise that everyone uses and owns data, it’s not just an IT issue • Importantly, for any project, business knowledge and experience is essential.
To respond with the correct tool, it is important to clearly define the question. To obtain positive cultural influences, organisations must look to change the most critical behaviours.
Key to this is ensuring that everyone is framing the objectives and requirements of any project, or programme of projects, established to address identified issues.
Identify the key pain points. Describe in detail the impact, consequences and emotions involved. Contextualise each problem and relate it to business objectives, which then inform hard metrics that can be used to measure the outcome, success and impact of a project.
This should not be a one-off exercise, but an ongoing process to identify opportunities for improvement.
MAKE YOUR DATA WORK FOR YOU
All organisations need a governance framework that helps shape data strategy, governance, data integration, architecture and data quality. Modern tools enabling automated and intelligent data processing are crucial. This includes removing the burden of repeated and non-value-adding tasks from staff, letting them focus more on leveraging the data for their primary goals.
When assessing which tools are appropriate, organisations need to look outward, then inward – outward in order to evaluate what tools are available and how their competition is using data; inward to derive competitive advantage by empowering their organisations to make better, faster, customer-focused decisions from data.
When assessing how best to analyse and utilise data, it is imperative to understand the desired outcomes to select the right data. Understand where the data comes from, how it was collected and what it represents.
This process is key to building trust in the quality of the outputs being used in business decision-making and ensuring accuracy in any external reporting.
It is particularly key that this data is consistent across the organisation. You want to work with one version of the truth.
In our experience, with appropriately selected projects, clients will see: • Improvements in revenue growth • Improvements in customer experience ratings
• Improved risk management process and controls • Greatly improved accuracy and consistency in statutory and regulatory reporting.
Using a few high-visibility, highimpact projects as catalysts to drive the right behaviours will help build an understanding of the merits of a datadriven approach.
Consistent use of data not only drives operational efficiencies, it facilitates a simpler and more transparent data governance framework and the creation of more robust controls.
Key metrics and key performance indicators can be delivered to boards and committees; data protection and classification processes can be simplified; and the impacts of data and cyber-related incidents can be clearly identified, which will help reduce risks and improve incident response.
DATA TRANSFORMATION: A TEAM SPORT
Effective data transformation programmes require an array of hard skills and technical knowhow, as well as soft skills such as being highly collaborative.
Companies taking their first steps by hiring a single person fresh out of university, or new to the field, are finding that this formula often doesn’t work. Recent graduates do not usually have the business acumen and leadership experience that is required to manage projects in an organisation.
Conversely, seeking that unicorn candidate who has the necessary level of methodical thinking, as well as programming skills, statistical knowledge and specialised business expertise, is difficult and expensive.
A more beneficial approach is to define the skillsets the programme needs and build a team of individuals who have diverse primary strengths that complement one another.
Importance should be given to finding and taking advantage of the required skills in several individuals and nurturing this talent in support of business goals.
Use a mixture of internally sourced skills, skills available from any outsourced service providers and partners and specialist consultants at a strategic level and based on specific project requirements.
The cross-pollination of ideas and viewpoints arising from practitioners from different backgrounds speaking the same language and exposing each other to new ideas, is a driver for innovation – a necessity for success in a field in a constant state of change.
STAY ON TRACK WITH KPMG
Our advisory professionals within KPMG in the Crown Dependencies have experience helping organisations with their data challenges. We have extensive experience in governance and control frameworks, project management and data analytics, as well as in advising on technology solutions.
Contact us today should you wish to discuss how we can help make your data work for you and help achieve an effective data-driven culture. n
Creating a data-driven culture is not just about strategy, it’s about transforming behaviours and mindsets about the importance of data
FIND OUT MORE
If you would like to find out more, contact Mark Stone, Advisory Senior Manager, at KPMG in the Crown Dependencies. Email: markstone@kpmg.com
