Semantics: The future of rule books and policy controls

A key focus of our RegTech Capital Markets conference this year was ‘the future of rule books and policy controls’. To discuss this topic, we assembled a panel of experts including Paul North, Head of Product Management EMEA at BNY Mellon, Alan Blanchard, Senior Associate and Handbook Publisher at the FCA, Mark Sweeting, Head of Strategic Change, Basel Measurement and Reporting at Credit Suisse, and Elliot Burgess, Head of Accounts and Client Services at JWG.

The main discussion of the panel echoed the focus of recent industry-wide collaborative efforts in the UK, such as the RegTech Council (RTC) and the FCA Techsprint,[1] of how technology can be used to automate the regulatory interpretation process, thereby making it cheaper, faster, more efficient and more effective. Automation using semantics is set to be the key focus of collaborative efforts in 2018 and beyond, a priority that was reinforced by the conference audience. When asked which regulatory domain should be of highest priority, 62% of our audience responded with either ‘machine-readable regulatory rule books’, ‘digitally filtering & routing regulations’, or ‘regulatory reporting and domain modelling’.[2]One conclusion reached by the panel of experts was that the status quo in terms of how regulatory rules are interpreted is simply not good enough. The general consensus is that regulations are not written in a way that allows for ‘smooth’ interpretation. For example, when asked, 60% of our audience stated that, in its current form, the FCA Handbook was fit for purpose either ‘to some extent’ or ‘not at all’. This led to the panel concluding that the Handbook certainly needed to be reviewed.

The current process in terms of regulatory interpretation is phenomenally time consuming and expensive. One major bank recently revealed that its MiFID II implementation process cost that particular firm $70 million dollars and that if at least 10% of this cost could be saved by automation then any initial investment made towards moving to a more automated process would be considered worth it.

The panel certainly agreed that automation could help reduce such costs, and collaborative efforts in 2018 will likely look to develop certain key artefacts viewed as necessary for the shift towards a more automated process. One such artefact, discussed by the panel, was a Regulatory Change Management (RCM) system that would automatically link regulatory requirements to specific controls within a firm. The panel concluded that the new RCM process should detail the impact on the entity, its clients, and the products it deals in.

Other regulatory tools will also be needed to support the mapping of regulatory obligations to business models. Key amongst these is a standardised functional taxonomy of an investment bank. Such artefacts would serve to develop a common language, required to establish the new paradigm shift. The panel concluded that there is no point in breaking down regulatory rules and re-writing them before this common language has been established. Clearly, this is something that needs to be on the agenda and we are pleased to be covering this at the next meeting of the RTC New Initiatives Working Group (NIWG) on 15 May 2018.

Whilst it is generally agreed that semantic technology is key, the panel suggested that technology alone is not enough. The industry needs people who hold the necessary expertise within firms who understand how the required regulatory tools work. For more detail surrounding this, please see the RegTech Council NIWG Whitepaper: ‘A New Paradigm for Regulatory Change and Compliance’.[3]

Ultimately, the cultural change will need to occur on both sides of the industry. Not only will firms need to use semantic technologies to aid the regulatory interpretation process, but regulators should also take semantics into account when writing regulations.[4] Only then can the interpretation process become as automated and as ‘frictionless’ as possible.

So, the big questions is: Is the industry ready to make such a monumental shift towards this new paradigm? In short, the answer is no. The industry is more or less in agreement that the shift will take time. Progress will need to be made piece by piece, resulting in more of an evolutionary process than a revolutionary one.

The 2017 FCA Techsprint showed us what’s possible through collaboration. 2018 will most likely be the biggest learning curve for the FCA and other regulators in terms of how regulations can be written. If the momentum is built upon then the required cultural change will come,  and the tools we build now will help us get there more quickly.

JWG has several RegTech Special Interest Groups (SIGs) which were established to bring all parts of the industry together to discuss how to best match compliance challenges with the latest technological solutions – covering trade surveillance, KYC/AML, and reporting and reference data. Want to get involved? Please contact Will Payne on will@jwg-it.eu for more information.

 

 

[1] The FCA Techsprint was hosted by Hitachi. A video demonstrating the event can be viewed at the following link: https://vimeo.com/250619433

[2] JWG RegTech Capital Markets Conference, 7 March 2018

[3] https://regtechfs.com/a-new-paradigm-for-regulatory-change-and-compliance/

[4] There is currently a review taking place in the House of Lords in terms of how regulation is written.

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