Building Bridges: Semantics in regulation

In financial services there is a chasm stretching out between key players when it comes to regulation. This chasm comes with a huge risk of plummeting, and what lies at the bottom? Hefty fines for non-compliance? Unmet policy goals? Unintended Consequences? All of the above, and what is causing this rift? Semantics.

The language used by the regulators is, at times, far removed from the language of firms that increasingly time-consuming interpretation must take place before firms are able to comply. So how do we bridge the semantic gap effectively?

The chasm

Financial regulation is increasingly complex and costly to comply with. At the same time regulators face the challenge of understanding, integrating and harmonising various regulations across jurisdictions, and of framing rules which achieve stated goals in a quickly evolving landscape. The result is mountains of regulation that require costly and time-consuming interpretation to bridge the gap and adapt into firms operating models, with the ever-present risk of non-compliance, yawning underneath.

Regulation must be translated into the structure and models of firms, as the conceptual scheme of the regulator is generally far removed from that of the firm. A recent example of this is MiFID II, 30,000 pages and billions of pounds to date to implement, with years of clarification still to come whilst firms struggle to understand what they are bound to implement.

Collaboration and standardisation

Out of this challenge however, has come an increasing focus on concepts that can provide a compass towards better regulatory implementation: collaboration and standards. To tackle MiFID II and other regulatory burdens, firms having been finding safety through collaborating to share interpretation of regulation, lowering the risk of non-compliance. Where there is no competitive advantage to be found in the interpretation of regulation, it is sensible to share the burden, decrease the duplication of effort and have the security of shared interpretations.

RegTech solutions are playing a key role here, for example, in helping to bring automation to the interpretive process. In fact, technology driven solutions in the collaborative space are gaining a lot of traction, even from regulators, seeking to improve the efficiency of the regulatory process. Recent examples of collaborative efforts where such processes have been developed include the FCA TechSprint, held in November 2017, and the various streams of the RegTech Council (RTC).

What these initiatives have done is successfully demonstrate that, if regulations are written using language more consistent with the industry, regulatory requirements can be turned into machine-readable and executable code and mapped to a specific business function of an investment firm. Should a regulatory requirement then change, the related control function of an investment firm can then be updated automatically. These efforts also show that there is willingness on both sides of the chasm to make the distance not quite so far or the journey not quite so costly, time consuming and treacherous, between the word of the regulator and implementation in the institution. For more information on see the FCA’s latest call for input.

Standardisation has a key role to play, employing open-standards-based semantic technologies can further help to automate the bridging of this semantic gap. There is a need for a common dictionary between firms and common data standards across the industry. Along with a change in culture of regulatory change, which currently identifies the differing conceptual schemes as an unbridgeable gap, the industry will need to adopt a standards-based approach and application of emerging RegTech solutions. Standardisation ensures quicker and safer implementation of new regulations, with long-term efficiency an important benefit which requires a short-term paradigm shift.

However, for open-standards to manifest, certain semantic artefacts need to be developed. For example, as the RTC New Initiatives stream has demonstrated, regulatory requirements can be automatically mapped to a specific function of an investment firm. However, for this process to be rolled-out to the industry as a whole, an agreed, standardised canonical model of an investment firm will need to be developed, a process that will face significant problems. For example, the unique and often archaic structure of various investment firms will most likely prove developing such a model to be difficult. The key point here is that, whilst complete automation with no need for human interpretation may be unachievable, and arguably undesirable, more intelligent mapping can substantially reduce the need for human intervention.

So, while there is still long way to go in building an interpretative bridge from the word of the regulator to implementation within the firm, the future looks positive, with key players in this space seeking to collaborate, share and employ new technologies to make this step in the process safer and more efficient.

This topic will be discussed on various panels at our third annual RegTech Capital Markets Conference on 7 March 2018. Further details of the agenda can be found here.

The aim of March’s event will be to see what firms, regulators and their suppliers have been doing about RegTech during the previous 12 months and to establish leading practices for RegTech. Registrations have topped 300 attendees from over 65 investment firms, regulators and standards bodies. If you would like to attend the conference then please register via this link. Better still, if you are employed as a senior manager at an investment firm you get in for free.

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