Two worlds collide
The two ever-present forces of regulation and technology have inevitably combined, and attendees at RegTech London heard how they could change financial services for the better

With the regulatory agenda showing no signs of abating and financial technology dominating headlines and conference schedules alike, it’s hardly a surprise that the two have clubbed together to create a whole new beast: regulatory technology, or ‘regtech’.

In London, asset managers, compliance experts and tech providers gathered to tackle the challenges and opportunities that regtech has in store, and how to manage them from here.

In the first session of the day, moderator and conference chairman Adrian Shedden, head of fintech at Burges Salmon, asked panelists to define ‘regtech’. One said it’s just “a handy label”.

The speaker said: “Large institutions are building new solutions in response to regulation all the time—for us, regtech is just another day at the bank.”

With regards to the challenges the banks are facing, the speaker noted that regulatory compliance is expensive, saying it is not unusual for large institutions to spend in the region of £1 billion on it each year.
“The rules are complicated. the volume of data you have to absorb and monitor is vast.”

There is also a challenge around managing change in regulations, which can involve tracking 600 regulators and regulatory bodies around the world. While large changes are difficult to miss, “it’s the smaller ones where there is a change to interpretation or refinement to a rule” that are more difficult to manage, the speaker said.

In a later session, a blockchain expert and founding member of the UK Digital Currency Association discussed the ways in which blockchain could be of use in regulation. First, the speaker said, the transparency that the technology affords allows participants in a blockchain to see exactly what is going on, while it’s going on.

“The regulators are being inundated with more and more data that they’re struggling to trace transactions through.”

In some cases, “the regulator will be a participant in the network”, not necessarily monitoring, but perhaps viewing activity in more detail that the other participants.
Transparency also means the flow of funds is almost instantly available, offering a means of searching every participants’ transactions and following the flow of each transaction, effectively “seeing its history”. It could allow audit processes to be carried out from a computer, in a very short space of time.

Second, the speaker highlighted the use of blockchain in the supply chain, for provenance of goods and high-value items. Ensuring certification of goods is “a real challenge in the traditional world”. For example, it can be difficult to ensure that the pills inside a box actually come from the manufacturer named on that box. The same principle applies to the financial supply chain.

Third, blockchain could improve current know-your-client (KYC) and onboarding processes, which the speaker called “primitive
and complicated”.

Banking clients typically have to produce passports and certified proof of identity over and over again, and “this is neither efficient nor particularly safe”.

Blockchain could potentially allow people to have an “identity that can be trusted”, that could be viewed by all participants of a blockchain, making KYC processes easier for clients and banks.

Finally, blockchain could potentially reduce settlement risk, according to the speaker. In a conventional payments system, a message is being exchanged, and there is credit risk in the delay of settlement.

Blockchain could be considered as both the payment system and the thing of value. It is both a digital representation of the
information and the access to that piece of information, and that is where the value lies.

Another panel discussion focused on the ways in which technology could be of help with regards to regulatory reporting. Panel moderator Nirvana Farhadi, a senior partner of Divergent Advisors and CEO of FFS-RegTech, noted that firms have to manage risk exposure and reporting for multiple different regulations.

Referring to the second iteration of the Markets in Financial Infrastructure Directive (MiFID II) in particular, she said: “MiFID II is very large, however, the reporting aspect of it is a beast.”

She added that the estimated spend in the UK for reporting under MiFID II alone is £2.2 billion. The cost breakdown of that figure across the industry is extremely challenging for firms that are already managing reporting obligations for up to 160 regulations across multiple jurisdictions, and this will lead to huge compliance and operational costs, putting a strain on different departments and business lines.

Farhadi added that firms will need a new “super breed” of compliance officers who have both regulatory and technical knowledge.

Compliance officers should be able to understand and implement the technology they’re using, addressing the actual problems the industry is facing. Rather than being disruptive, she said, this technology can help provide the solutions for financial institutions while leveraging existing systems.

Robin Smith, technical director at Actiance, suggested that any business operating in a compliant manner is already using regtech in one way or another, however, many are still using legacy applications and systems.

He said: “These systems were never built to handle the data volumes or data types that we’re using today.”
Some organisations are struggling with the requirements, and specifically with the quality of data required, he said.

Each organisation has a lot of data in a lot of different places, and they have to maintain all of those systems, keeping risk and compliance teams in the loop and also educating IT managers and other staff.

Equally, Smith said: “The regulators say they want banks to declare any relevant electronic content, however new messaging applications can be difficult to monitor so the tendency is for companies to block the use of newer applications with clients and internally. This is an issue that should be addressed not only for the good of future employees but also future customers.”

If they can’t communicate in a manner they are comfortable with they’ll become someone else’s customer, he said. If this type of messaging culture is not made to be compliant, that behaviour will be driven underground.

Focusing on the human aspect of regtech, Subas Roy, a director at EY, suggested: “The issue the financial services industry has got is trust.” It seems that smaller ‘challenger’ banks and fintech start-ups can offer customers better-value deals, and at the same time, customers have limited trust in, and loyalty to, the older and larger institutions.

Service providers that are innovative and have the trust of the customer will have added advantage, he said, and regtech poses an opportunity for financial services providers to adapt to become more trustworthy.

Regtech could improve monitoring for market abuse, as well as surveillance and reporting on financial crime, allowing firms to implement more pro-active solutions, and also helping them to centralise their compliance functions.

Data analytics can help firms better understand the customer, leading to improved and more profitable solutions that will “benefit the business as well”.

Roy suggested that institutions should focus on “bringing compliance into day-to-day functions”, ensuring that compliance departments are involved in the development of new products before they’re brought to market, rather than judging products on completion.

He pointed to “compliance by design”, taking a step back and making an effort to understand the risks, not regulation-by-regulation, but by themes. However, he conceded: “There are complexities and there is no easy win.”

Roy pointed out that client demographics have changed, and that the way people perceive financial services is changing, including their demands.

Shedden added to this, suggesting that firms must bear in mind the fact that they’re developing solutions for a new generation, not considering financial services as a standalone industry, but in a modern context.

The industry is likely to see an emergence of more human-led design, with solution providers striving to understand clients’ pain points and looking for answers to those issues, rather than creating “technology for technology’s sake”.

The focus should be on introversion, sharing and collaboration, Shedden said, “and technology follows”.

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