Citihub Consulting Partner Bob Mudhar examines the relationship between regulatory technology (RegTech) and finance technology (FinTech). Are they different sets of technologies and disciplines or are they complementary?
As regulatory pressure increases in the financial services sector, how important is innovative measures for companies to remain compliant?
The reality for most firms we interact with (tier 1 Investment Banks and some tier 2s) is that remaining compliant to regulatory pressure is rarely a driver for technology innovation. Sometimes, a new solution is implemented for, say, transaction reporting, but the technology it is based on may not be innovative – merely a new system. Much regulation is about data capture, reporting, and transparency. For these use cases, firms invested in data lakes. These may have been innovative for the firms involved, but rarely a new concept. Being highly innovative when meeting regulatory requirements carries significant risk. What firms must balance is the risk involved in the interpretation of the regulation, which is rarely prescriptive, and the technology risk of implementing new innovative technology. One type of risk is generally enough for most firms to deal with, compounding the two together requires a special kind of courage… or foolhardiness.
The better place for technology innovation is to improve the run-the-business operating efficiency of meeting regulatory requirements once any new regulatory regime is in place and working. The typical lifecycle of meeting new regulation post go-live involves a highly manual and intensive initial operating model that is characterised by frequent failures in operation and high cost. Few firms can continue in this manner for long. It is in trying to move to a target operating model that is lower cost, standardised and low touch that there is a place for innovative technologies. At this point, firms have understood and interpreted regulation and can focus on improving the technology. For example, many firms met MiFID II transaction reporting requirements but were burdened by high levels of daily exceptions that required significant effort to manage down. Once this was done, there is still a question around being sure all eligible business events have been transaction reported. In order to address this, firms have been turning to AI to take extra steps to prove everything that should have been reported has been.
In summary, innovation is not important to meet regulation – meeting the regulation is the most important thing. Improving the efficiency with which you continue to meet the regulation can benefit from innovation.
What trends are expected in regulation in the next 12 months and how will the world of RegTech respond accordingly?
Regulators have made provision in MiFID II to see more data on a daily basis and request more data. Firms should expect ad hoc requests to become more frequent and the expected time taken to respond to them become shorter. Furthermore, there is another raft of transaction reporting regulations due (SFTR, CFTC, CAT for example). Regulators will be looking at recently live regulation and issuing guidance notes giving post go-live clarity – for example from the FCA around costs and charges. Fines for MiFID II non-compliance are probably premature in the next year – consider that the recent transaction reporting fines were for MiFID I. Instead, regulators will be suggesting changes and expecting those to be implemented before a future visit. Specifically, for the EU, if/when Brexit is enacted, firms might find themselves doubling up on regulatory reporting.
RegTech needs to demonstrate how existing investment in solutions can be extended or re-used without having to implement whole new solutions. Making RegTech relevant without a linear increase in spending will be attractive to firms. RegTech firms must also offer services around implementing control frameworks to monitor and managing ongoing compliance whilst new regulations are being met. Firms cannot miss existing requirements as they implement solutions for new ones.
Will we see RegTech break out from the FinTech pack and cement its prevalence in financial services?
Most innovation follows a lifecycle. It is not a significant stretch to think that yesterday’s order winning functionality e.g. AI reporting modules; will become tomorrow’s base product. In this sense, solutions in RegTech will need to move innovation into standard product. They will need to continue to innovate and find functionality that potential users do not even know they need… yet.