Getting it right in ‘RegTech’

RICHARD RATTUE Managing Director, Compli-Serve SA

The 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.

THE DISRUPTIVE AGE IS HERE, WHETHER YOU ARE READY OR NOT

Heating up

As is often the case with change, there can be heat, and RegTech is no exception. Hot elements I anticipate coming to the fore include verification of identity, data capture aggregation, regulatory risk analysis and accuracy of reporting. Machine Learning and Artificial Intelligence are becoming increasingly prevalent, Big Data is already on our minds and RegTech could shape the way we analyse trader behaviour and manage verifying identity.

The Regulator rules

Supervisory Technology, aka SupTech (another term you best get familiar with) is enabling regulators, on the other hand, to use technology to spot smoke as well. It allows for analytics on market participants, it provides a proactive and intelligent analysis of data and trends in the marketplace and makes way for the growing interest in handbooks that are readable by machines, as well as enables the development of Supervision Bots. 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.

Consumer-driven times

If other parts of the world are anything to go by, technology is changing the game and empowering consumers. Smart regulations will indeed pioneer a new way forward in delivering financial services. While for many this threatens the status quo, failing to adapt in the end could mean fading away altogether. RegTech comes with a number of advantages from a quicker turnaround of service to increased transparency as it comes with enhanced fraud and behaviour detection. It is adaptable and scalable and the evolution of the RegTech eco-system will see the continued integration of smart solutions.

Challenge accepted

While posing some challenges, RegTech will enable smoother and faster processes and makes way for upskilling of staff, including 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.