28 February 2019
RICHARD RATTUE Managing Director, Compli-Serve SA
NEWS & OPINION
9
Getting it right in ‘RegTech’
T
he financial services industry may wonder about the way forward for compliance and risk functions as Regulatory Technology, or RegTech, becomes undeniably a factor for all. In the past, compliance programs were largely unprepared for the risks associated with a shift to technology and were rather geared towards the tick-box approach. The lack of data analysis went hand in hand with firms and regulators being typically under-resourced across the board, highlighting the glaring deficiencies in compliance and risk areas. Global speed As we move into a time of increasingly frequent and intricate rules and as the digital age further shapes financial services, when looking at the global picture, the shift towards sustainable compliance is evident – and necessary. There have been 50 000 new regulations across the G20 since 2014, while the Markets in Financial Instruments Directive (MifID2) comes in at 30 000 pages (or 1.5m paragraphs, depending on how you prefer your word count), while surveys reveal positive results in favour of an improved compliance function. Positive statistics further reveal the hiring of 9 000 people dedicated to compliance and control functions in the industry, according to @ Citi for 2014-2018, while according to Nasdaq, compliance spend in firms saw a 56% increase between 2014 and 2017. Banks, according to the TR Cost of Compliance Survey, reported a 67% increase in compliance spend in 2017. These trends point towards the growing awareness of ‘RegTech’ as cryptocurrencies become the norm for many, even though their regulation is still developing. A big launch Compliance and risk functions are of course not immune to disruption and for those who ‘fail to launch’, the consequences could be dire. Regulators are increasing their demands for more detailed data reporting, accompanied by a $2.3bn spend by banks on compliance functions. The disruptive age is here, whether you are ready or not. Big Data and its interpretation are massive and increasingly becoming a real aid for compliance officers to try and spot smoke before we have fires. They sometimes can’t spot the smoke because they are under-resourced, and
their field of view is just too great. RegTech helps to solve compliance challenges in a smarter and faster environment, assisting in meeting enhanced regulatory reporting standards, reducing barriers to entry, automating routine compliance tasks where possible, and thus augmenting the human resource.
Watch this space indeed. There are, however, roadblocks and challenges for RegTech, and regulatory acceptance is key among them. The outdated market rules, stakeholder resistance and legacy infrastructure already in place point towards slow adoption to change by the top level, as well as skills or system shortages. It will be interesting to see how the Regulator takes it on locally.
Heating up As is often the case with change, there can be heat, and RegTech Consumer-driven times is no exception. Hot elements I If other parts of the world are anticipate coming to the fore include anything to go by, technology is verification of identity, data capture changing the game and empowering aggregation, regulatory risk analysis consumers. Smart regulations will and accuracy of reporting. indeed pioneer a new way forward in Machine Learning and Artificial delivering financial services. While Intelligence are becoming for many this threatens the status increasingly prevalent, Big Data is quo, failing to adapt in the end could already on our mean fading away minds and RegTech altogether. THE DISRUPTIVE could shape the RegTech comes way we analyse with a number of AGE IS HERE, trader behaviour WHETHER YOU ARE advantages from a and manage quicker turnaround READY OR NOT verifying identity. of service to increased transparency as it The Regulator rules comes with enhanced fraud and Supervisory Technology, aka SupTech behaviour detection. It is adaptable (another term you best get familiar and scalable and the evolution of with) is enabling regulators, on the the RegTech eco-system will see other hand, to use technology to spot the continued integration of smart smoke as well. It allows for analytics solutions. on market participants, it provides a proactive and intelligent analysis of Challenge accepted data and trends in the marketplace While posing some challenges, and makes way for the growing RegTech will enable smoother and interest in handbooks that are readable faster processes and makes way by machines, as well as enables the for upskilling of staff, including development of Supervision Bots. compliance officers, as well as putting
‘digital first’ friendly regulation firmly on the map, which further changes the game with regulation designed to primarily suit the digital space. Machine readable handbooks and rules are being introduced, which will improve processes and the Regulatory Sandbox framework we find ourselves in facilitates the rapid growth of the FinTech industry overall, but in a calculated way where businesses are able to test various innovations before adopting them. An increasing utilisation of the Blockchain backbone for secure straight-through processing to industry partners and regulators will become the norm, and firms are likely to appoint ‘digital transformation’ teams to ease the process. The role of the Compliance Officer in 2025 Looking ahead to how things will change in the coming years, the role of the compliance officer will look quite different. He or she will utilise RegTech support as a matter of course, with strong digital support available whereby machines can review entire data sets, negating the need for sampling and improving the risk of human error. Financial services, I believe, are transitioning into a ‘digital first’ era and we all need to board the train and navigate as best we can. The most sophisticated technology, however, is largely useless if the culture of evading the rules remains rooted in a firm. If you can get the culture right, the rest will follow.
