Via Fin Extra : Could RegTech save the banking industry?
RegTech alone will not save the banking industry. It must embrace digital and work out the supply chain disruption that #FinTech has created. However with profit margins continuing to shrink, regulations continuing to add further complexity on an already muddled landscape. Automation of process using technology, innovative use of technology to reduce risk and improve conduct is a golden opportunity for the RegTech players.
Don’t take my word for it – I sought out inspirational CEO’s, Evgeny Likhoded (CEO and founder of ClauseMatch*), and Taras Chaban (CEO of Sybenetix) to gain some unique insights. I also talked to a senior manager in the industry who has worked in both a regulated role in a bank and at a regulator.
Here are the excerpt from those interviews.
Q: Can you explain your role?
Evgeny: I am the founder and CEO of Clausematch.
Taras: I am the founder and CEO of Sybenetix.
Q: The UK government has recognised #RegTech as a real thing. Can you help me understand how big a problem is regulation to the Financial services?
Evgeny: The FCA regulates 55,000 firms from small to very large. New (regulated) entrants into the market face a big barrier to be compliant, both in reporting but in conduct. Even if they get over the barrier, the 2nd issue they face is regulatory change – how are you informed of the change and how do you asses the impact on you?
Taras: Financial services face an unprecedented tsunami of regulation not least from MAR and MiFIDII: The sheer volume of data to be reported and monitored makes technological solutions an absolute necessity. Just look at transaction reporting in the UK, the FCA has signed an agreement to capture and store the data in AWS, such is the scale and complexity of MiFDII reporting.
ANON: Some firms argue that over three quarters of their investment in change is aligned to regulatory triggered activity. Even allowing for over statement and secondary benefit from a primary investment, this is a lot.
Q: How exactly are companies trying to deal with the problem today?
Evgeny: with lots of manual effort in a very protracted supply chain. (the supply chain) is law firms/consultants monitor and do a high level interpretation. Regulated firms then decide whether they are impacted and if they are write policies to enforce behavior. Prediction is another interesting field, can you predict changes as a result of an enforcement and fine.
Taras: We work with a lot of discretionary investment managers (DIMs) and their regulatory obligations in many cases are new requirements. We see some companies trying to deal with reporting and thematic reviews with a lot of manual effort (and excel). This is a very reactive response and one that cannot effectively scale.
ANON: They aren’t really coping well. The change comes from such a diverse set of directions that it’s difficult/impossible to “deal” with it effectively. Damage limitation is the key strategy.
Q: How is technology changing this approach and can you give any real example of the benefits
Evgeny: The incumbent technology providers are slow to change. Even though RegTech is small, it’s still complex and includes a few different areas e.g. Reg (transaction) reporting, Reg change management (when regulations change) etc. We have carried out an implementation where a bank user owns a policy, what happens when the regulation changes requiring them to act? How are they notified/alerted? How does the firm know the impact of the change? What are the downstream impacts? (e.g. changes to client terms and conditions). In one example for MIFD II a bank might have 100’s of policies being affected by a consultation policy or rule change. The benefits are clear – automation and alert of policy changes reduce risk of missing something. Increasing the lag between reg change to implementation (of the policy) and finally it shows great corporate governance & Senior Management oversight, you really are demonstrating to the regulator that you have addressed the change.
Taras: We use a combination of technologies to create behavioral scoring and algorithms. There is no doubt the technology has matured, but more important is the understanding and acceptance by our clients has increased in the last 2 years. We see compliance (surveillance & reporting) as a recent use case but we add value by being able to understand team performance and behavioral decision-making.
ANON: Sharing is the key way forward. Not having to make every change yourself. However implementing sharing is harder than a one off change, so you have to be forward looking. New services to share hold some promise.
Q: What specifically is your company doing to help regulatory impact of Financial services
Evgeny: The FCA has an XML of their entire handbook, it’s 900 pages and manually created from word docs, so you can imagine how onerous that is – our platform could help them with that problem. One of your most successful projects is in working with a large bank to help them implement global policies, frameworks and standards. It include authoring, approval and implementation of policy documents. We work in partnership with JWG, they provide the Reg updates and a taxonomy . The taxonomy allows the tagging a regulation or a clause to a specific industry or product area and thus which policies need to be changed. In the FCASprint*** we partnered with JWG to demonstrate how this works.
Taras: We free up the time of Compliance Officers to do proactive tasks, such as investigating alerts before the regulator comes knocking on the door. We are also working in the Algorithmic trading space and starting to investigate partnerships to increase our presence in the marketplace.
ANON: Keeping their eyes open to collaboration.