Big data to smart data

Market participants need to exploit their data in a more intelligent way, according to Mathieu Maurier of Societe Generale Securities Services...

The global regulatory environment is becoming more challenging for asset managers, insurers and other financial institutions. An increasing number of regulations are emerging at the national, regional and international levels.

Failure to comply with regulation is not an option—punitive fines are imposed on financial institutions that breach compliance rules. Asset servicers play a key role in simplifying regulatory requirements for their clients and ensuring that they can focus on their core business.

The question for market participants is how they can turn a regulatory constraint into an advantage. Technology can be deployed to create more value for asset servicers and their clients, bringing more possibilities to exploit data in an intelligent way.

Often, regulations can prove to be a moving target as amendments and refinements are made along the way. The date of effect of some of the provisions of the UCITS V directive, for example, have been postponed as provisions are further specified. The Markets in Financial Instruments Regulation has been delayed as the European Commission gives market participants more time to meet technical implementation challenges.

A significant amount of data is being shared and exploited as a result of regulatory requirements, particularly with regards to reporting. For example, the Alternative Investment Fund Managers Directive (AIFMD) requires fund managers to report data and information to their regulators. Non-European managers marketing funds in Europe are required to report separately in each country in which they are marketing, and different countries have different AIFMD reporting requirements. The reporting formats and requirements are continuously changing and the workload to comply is substantial.

Typically, asset servicing providers and their clients have adopted a ‘big data’ approach to cope with the huge volumes of data that their businesses are producing and that regulators require. Big data refers to data sets that are large and complex and for which traditional data processing solutions are inadequate. The big data approach resulted in an enormous amount of data everywhere, out of which it was difficult to get implicit meaning.

Regulatory technology firms have emerged to help firms move away from the concept of big data and towards ‘smart data’. This means enabling financial institutions to exploit the data that is being requested by regulators in a much more intelligent way. At present, the industry is swamped with data, much of which has little meaning attached to it. Regtechs, which are a subset of financial technology firms will help asset servicers and their clients to have a more meaningful view on the data itself.

Asset servicing providers know a great deal about data. There is a thin line now between the concepts of asset servicing and data servicing. Investments are being made to develop tools to help clients get true meaning out of data and to help them focus on their core activities such as investment management, trade execution, or insurance advice. Asset servicing providers cannot do this alone, they need to work with regtechs to achieve smart data.

Regtechs can help incumbent asset servicing providers to be more nimble and agile in fulfilling regulatory obligations and dealing with regulatory constraints. There is a paradoxical situation when it comes to data—the more data we exploit, the higher the risk of breaching some compliance obligations. Regtechs should help here, particularly with know your customer (KYC), anti-money laundering (AML) and cheque fraud requirements, in getting the full meaning and therefore the best usage of the data.

With KYC, for example, technology has a key role to play in breaking down barriers and helping firms to go the extra mile to determine not only who their customers are, but who their customers’ customers are, into the future and even further along the chain. A utility approach towards KYC data, for example, will help market participants to capitalise on data without endlessly redeploying and replicating the same processes across the industry participants.

There are no differentiating factors or competitive advantages in data collection for industry players and therefore a utility approach makes sense.

Regtechs may not only help securities firms to be more compliant, they may have the potential to assist regulators to be more specific and precise in the type of data they request, and also to develop more meaningful controls and data gathering. At present, the return on investment compliance is limited for all players because so much data is being collected, out of which it is difficult to get any implicit meaning.

As always, there will be winners and losers in fintech and regtech. The aim of technology should be to enable large organisations, such as global custodians and asset servicers, to be more nimble and agile in responding to regulation and client needs. Technology will play a role in transforming a very complex environment into an agile one.

It can seem that navigating the regulatory environment is like driving through fog—to protect yourself, you wear a seatbelt, limit your speed and turn on fog lights. To navigate the financial regulatory environment, we must embrace new technology to help us clear the fog.

This will enable the industry to turn what may at present be seen as a constraint into an opportunity, bringing value to our clients and therefore the market.
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