Technology and the ascent to compliance

The rise of [insert-abbreviation-here]Tech companies signifies a pragmatic shift of business consciousness toward solutions that make use of advances in modern technology. In the banking sector, the magnitude and complexity of firms has immobilised the possibility for innovation. FinTech solutions attempt to combat this issue by producing new and intuitive services for banks and the consumer.

The industry is plagued with legacy systems, infrastructural bottlenecks and a lack of harmonised standards that prove problematic in keeping up with the increasing demands of the regulators. As such, regulatory technology has emerged out of a necessity for banks to take a more invested, specific approach to compliance across all business lines, in more dynamic and cost-efficient manner.

RegTech will transform how risk looks at new FinTech business models

The issue of risk and its scrutiny from regulators, specifically since 2008, has come under great examination. Basel III, the Capital Requirements Directive IV (CRD IV), Comprehensive Capital Analysis and Review (CCAR) are but a few of the legislative texts that have come into force to assess the risk exposure of banks post-crisis.

BCBS 239, Principles for effective risk data aggregation and risk reporting, for example, outlines the requirement for firms to ensure accurate and reliable risk data is available on an automated and real-time basis. Regulators will be requiring firms, at any given moment, to make on-the-spot calculations, under varying stress scenarios, of how this is likely to affect capital and profitability, with assumptions and methodology, in the space of just a few days.

The problem with defining this exposure arises from the scale and diversity of a bank’s internal organisation – trying to extract large quantities of data, in an immediate and definitive manner, from a collection of independent operating arms or ‘silos’ and not one cohesive entity.

Enter RegTech – a breakthrough of technology driven, compliant focussed innovation, that allows firms to improve efficiency and transparency across regulatory obligations in a smarter, cheaper and faster way.

The key differentiation between legacy systems and RegTech is the capacity for a dynamic and intuitive approach to risk data collection. Advanced techniques utilise big-data analytics to interpret and simplify vast amounts of unstructured data, from a variety of sources and compute the findings. These results can be modelled, visualised and accompanied by a full data lineage to be served up to the regulator as they see fit.

Risk and compliance monitoring works to provide an unobtrusive, always-on approach to risk management – allowing firms to consistently determine the validity of transactions, positions and market behaviour. One of the main objectives of this technology is to break down the previously mentioned ‘silos’, to promote communication and determine ‘one single version of the truth’.

Firms are already utilising these technologies – artificial intelligence and big-data analysis is being used to monitor pre- and post-trade compliance. Requirements under MiFID II are being fulfilled by the creation of breadcrumb trails for trade decisions throughout the execution process – a concept particularly beneficial for algorithmic traders, as performance comes under greater surveillance.

These forward-thinking systems also help to engineer an informed approach to future business management. Today’s technology, cloud-computing for example, can be seen to provide conscious reductions in capital expenditure and expand the potential for innovation. Moving from extensive, in-house IT infrastructure to adaptable, external services on a pay-as-you-go premise gives scope for firms to sculpt and develop business proposals in a new light.

There’s still a way to go

Development within the field of RegTech is extensive, yet industry-wide adoption of the technology is still to actualise. The process of installing any new technology within a financial institution is riddled with complexity – the size of a corporation makes widespread cooperation difficult; intricate security measures and funding challenges call for many hoops to be jumped through prior to any go-ahead.

Regulatory compliance relies upon a collaborative approach – the problem being these siloed projects bring about a fragmentation of the business landscape. Firms should look toward a solution that enables analysis across the spectrum, incorporating significance for all aspects of activity.

And the rule makers can aid this process – standardisation is key to closing the gap between intention and interpretation. Technology will optimise the process for regulators and the regulated – digitising legislative test into a machine-readable format, made accessible through APIs, will encourage integration between parties and lead to a greater understanding of ‘what good looks like’.

The stage has been set…

Regulators such as the FCA are actively encouraging firms to invest in new ideas; launching Project Innovate to stimulate the creation of unique services to the market. A Regulatory sandbox, the first of its kind, has been offered as a platform for innovation; allowing businesses to test products and services in a live environment without the restriction of a full regulatory framework.

JWG were involved in the FCA’s November TechSprint that showcased the potential of RegTech solutions for ‘unlocking regulatory reporting’. Later this month, the RegTech Capital Markets Conference on 28 February 2017 will bring together participants from across the industry to discuss the future of RegTech and understand how the technology is redefining the way firms are managing their obligations in a smarter, more efficient manner.

RegTech is intuitive and scalable, but as with the emergence of any new technology, it will take time for the potential to be realised. It is evident that the industry is keen to adopt a more symbiotic relationship with regulatory bodies, it is in their best interest. A forward-thinking and collaborative approach will inevitably inspire informed decisions, leading to greater clarity and greater returns – it is just a matter of time.

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