Financial regulation isn’t new. In the UK, the banking act in 1979 was the first UK Act to put banking regulation on a statutory footing. Prior to this there was no regulation of the sector. Whilst the focus of regulation – in particular post crash since 2008 – has been to protect consumers, it also is there to help drive innovation within the sector.
It’s been nearly 10 years since the original ‘Markets in Financial Instruments Directive’ (MIFID) first came into force. Since then we have seen the rise of Facebook, the iPad and importantly a new era of challenger banks. However, as MiFID II is fast approaching, can we say we have seen the same level of innovation in the financial regulation space? We believe not yet – but a new era of innovation will soon be upon us and RegTech is here to make a splash.
The ongoing wave of regulation
Over the last ten years, the banking industry has struggled to respond to the ongoing wave of regulatory and reporting requirements, which are only due to increase in size and complexity over the next couple of years. The Business Insider UK stated “from the 2008 financial crisis through 2015, the annual volume of regulatory publications, changes, and announcements increased a staggering 492%”.
At Moorhouse we have been having working with global investment banks and seen first-hand the challenges of implementing global regulations including Dodd Frank, EMIR and FATCA. As the discussion goes on as to whether it was right or wrong to subject the sector to so many regulatory requirements, the banks have had to operationally respond with tactical processes to meet compliance deadlines. The challenge now is that as time has passed, these tactical processes have multiplied and failed, leaving institutions laden with risk and operational debt.
Entering into a new era of innovation
Technology must play a fundamental role in delivering innovative solutions to the banking industry. The days of antiquated systems and spreadsheets must make way for solutions which are specifically designed to allow banks to boost their responsiveness to regulatory changes.
This is where in our view RegTech enters the equation. The UK Chief Scientific Advisor’s 2015 report described RegTech as “Technology that encompasses any technological innovation that can be applied to, or used in, regulation, typically to improve efficiency and transparency”.
The name may sound a little unimaginative but the reality is anything but. In fact, the current RegTech ecosystem is exploding, with dozens of RegTech starts-ups entering the scene ready to take on the challenges thrown up by the industry.
Opportunity for change
The Financial Conduct Authority (FCA) originally coined the term RegTech in 2015 and the industry has been on the lookout for new technologies ever since. In July 2016, the FCA released a feedback statement to their ‘Call for input on supporting the development and adopters of RegTech’, which outlined the opportunity to adopt exciting and new technologies across four key areas:
- Efficiency and collaboration; Technology that allows more efficient methods of sharing information.
- Integration, standards and understanding; Technology that drives efficiencies by closing the gap between intention and interpretation.
- Predict, learn and simplify; Technology that simplifies data, allows better decision making and the creation of adaptive automation.
- New directions; Technology that allows regulation and compliance processes to be looked at differently.
The opportunity for change is potentially huge. Increased efficiency may be improved through collaboration and the use of shared utilities, where numerous banks share processing costs by entrusting them to a third party. Online communication platforms may potentially make it easier for financial organisations to collaborate. The recognition of specific new technologies such as Blockchain and machine learning may take the industry in new directions.
At Moorhouse we have already seen how important these four areas are in meeting regulatory deadlines. There is no question in our view, promoting the use of industry utilities will increase the quality of data brought in to the banks and allow them to increase their straight through processing by taking advantage of data driven technologies.
Interestingly, there is also industry wide recognition that the regulation itself is in urgent need of digitisation. This will require a common understanding of regulatory data and the FCA even suggested using an interactive ‘Robo-handbook’ so firms can understand the impact of new regulatory rules to their systems and processes. For us, this is a hugely important area which will allow compliance and operations processes to be looked at in a different way and truly unlock the opportunity for efficiency and collaboration.
Barriers to adoption
The complete list compiled by the FCA is certainly comprehensive and shows a positive outlook for those trying to take on the regulatory wave. However, with opportunity comes challenge and due to the early development stage of many RegTech solutions, it is considered a large risk to invest in such fundamental change during times of uncertainty. Even if RegTech start-up’s secure the required investment, there are industry wide barriers to RegTech adoption. These include the lack of standardisation across data and definition of the regulations themselves, as well as the uncoordinated deadlines which often force firms back into a reactive state. Removing these barriers to adoption is a responsibility that sits with the regulators themselves and requires their leadership and commitment to the future adoption of RegTech.
Is RegTech the answer?
It’s very clear that Banks are seeking better ways of doing things and the volume of regulatory change cannot be sustained using the processes and technology of the past. This has clearly been recognised by the regulators who are creating an environment to foster innovation and increase the adoption of RegTech solutions. So, the demand is out there and the RegTech ecosystem is expanding day by day, with new and exciting opportunities out there for the taking. Whether RegTech will enable Banks to ride the regulatory wave in an innovative, controlled and efficient manner comes down to the wider role of the regulators and whether or not they can work together to improve the standardisation of the regulations themselves and coordinate deadlines to stop banks for operating in a reactive state.
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