Nirvana Farhadi

Niv's Notes: Why RegTech is set to transform compliance and regulation in financial services

Blog Post created by Nirvana Farhadi Employee on Jun 26, 2017


The regulatory burdens placed on financial services organisations has reached unprecedented levels.  From data security and access with GDPR to investor protection and the various themes in MiFID II/MiFIR, businesses are besieged by new regulations on an almost monthly basis.


According to Business Insider, from the 2008 financial crisis through 2015, the annual volume of regulatory publications, changes and announcements has increased by a staggering 492%. It is an issue I have addressed not only at the numerous events I have spoken at and attended since joining Hitachi, but throughout my career.


Understandably organisations are looking for ways to ease this regulatory burden through automating onerous processes, and are looking at ways to make the Risk, Compliance, Operations and Audit (ROCA) line of business more cost effective, efficient and take away the resource burdens that these organisations currently face.


After all the business of these organisations is not ROCA, rather they are in the business of generating revenue, which these functions clearly don’t. The need to ease this burden, has seen the rapid rise of RegTech or Regulatory Technology.


The idea behind RegTech is that it harnesses the power of technology to ease regulatory pressures. As FinTech innovates, RegTech will be needed to ensure that the right checks and balances are quickly put in place so that organisations do not fall short on their regulatory obligations.


RegTech is not just about financial services technology or regulations, it is broader that and can be utilized in numerous industries such as HR, oil & gas, pharmaceutical etc. With RegTech, the approach is to understand the “problem” (be it operational, risk, compliance or audit related), see which regulations it will be impacted by this problem, and solve it using technology.


RegTech is a valuable partner to FinTech, although some refer to it as a sub-set of Fintech, in my view RegTech goes hand-in-hand with FinTech - it should work in conjunction with financial technology innovation.


RegTech focuses on technologies that facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities. RegTech helps to provide process automation, reduce ROCA costs, decrease resource burdens and creates efficiency.


FinTech by its nature, is disruptive. It aims to give organisations a competitive edge in the market. When FinTech first took off one of its main disruptions was the creation of algorithmic and high frequency trading systems, at lightening speeds.


As these FinTech innovations have become faster, more in depth and more intricate, regulators across the globe have sought to establish some boundaries to prevent fraud, protect consumers and standardise the capabilities of this technology. 


The accelerated pace at which FinTech has been adopted and is constantly innovating, means the regulators have struggled to keep up. Now however, far reaching and broader regulations are being established regularly – hence the requirement for RegTech to help manage this plethora of rules and procedures. RegTech is particularly relevant within the ROCA arena, where having oversight of the regulations is deep within their remit.

The financial services industry is heavily regulated, through myriad interlinking global regulations. These regulations are implemented through reports – whether it’s through trade/transaction/ position/periodic reporting or through some sort of disclosure.  Reports are the lifeblood of regulation and are based on data - therefore data is a crucial part of compliance. 


At the core of most regulations is the need for financial services organisations to locate, protect and report on the data and information held within their systems.  The regulations require not just audit trails, but each report must demonstrate exactly how data is handled both internally and externally. 


Reporting and regulation is unavoidable for all financial services organisations.  FinTech, which is just developing and not regulated yet, will catch up very quickly, as the regulators quicken their pace in keeping up-to-date with innovation and possible disruptions.


The challenge is collating and curating this level of information from the existing systems within the banks, within the deadlines specified by the regulations. This why RegTech exists and plays such a key role.


At a very fundamental level, RegTech helps financial services organisations to automate many of the manual processes, especially those within legacy systems, whether that be reporting, locating customer data, transactional information or systems intelligence. 


The crucial element here is not only the legacy and aging systems still held within many financial institutions - where data is stored in everything from warehouses to virtual arrays, and therefore locating and retrieving information from such becomes a huge challenge - but the legacy thinking of leadership in organisations is also problematic.


Many of these organisations are led by individuals whose only thought is the next 6 months. As Warren Buffet, however stated “someone is sitting in the shade today because someone planted a tree a long time ago.” Leadership need to think strategically.


The Recent WannaCry Ransomware attack is a perfect example of the dark side of legacy thinking and systems. Had leadership in those effected organisations made strategic infrastructure investments, replacing existing systems which are vulnerable to attack with modern systems implemented with the correct governance, systems and controls, this attack would not have caused as much harm as it did.


By using RegTech to automate these tactical and manual processes, it streamlines the approach to compliance and reduces risk by closely monitoring regulatory obligations. Vitally, it can lower costs by decreasing the level of resource required to manage the compliance burden. And RegTech can do so much more than just automate processes.


Organisations are using it to conduct data mining and analysis, and provide useful, actionable data to other areas of the business, as well as running more sophisticated aggregated risk-based scenarios for stress-testing, for example.


Deloitte estimates that in 2014 banks in Europe spent €55bn on IT, however only €9bn was spent on new systems. The balance was used to bolt-on more systems to the antiquated existing technologies and simply keep the old technology going. 


This is a risky and costly strategy. The colossal resource required to keep existing systems going, patched and secure, coupled with managing the elevated levels of compliance requirements will drain budgets over time. Beyond that, the substantial risk associated with manually sourcing data, or using piecemeal solutions presents the very real risk of noncompliance.


RegTech is not a silver bullet and it is not going to solve all the compliance headaches businesses are suffering from. However, as the ESMA (European Securities Markets Authority) recently stated firms must “embrace RegTech, or drown in regulation”.


RegTech will play a leading role, especially when used to maximum effect. Take, as an example, reporting.  We know through our research than this is an industry-wide challenge; on average a firm has 160 reporting requirements under different regulations globally, each with different drivers and usually with different teams producing those reports.


By using RegTech, not only could those team resources be reduced, but the agility and speed with which reports can be produced will ensure compliance deadlines are adhered to. Additionally, resources can then be focused elsewhere, such as on driving innovation and helping to move the company forward. 


Rather than focusing on what a burden the regulations are, by using RegTech organisations will see them as an opportunity to get systems, process and data in order, and to use the intelligence and resources to drive the company to greater successes. To take it one step further, I believe regulation does not hinder or stifle innovation - but in fact breeds creativity and innovation.


If you would like to learn more about RegTech and my work with Hitachi follow me on Twitter and LinkedIn.