Since the financial crisis, the increasing levels of regulation along with more demanding regulatory expectations have had a substantial impact on businesses in the financial services industry, requiring more people, processes, and technology solutions. The more recent elevated levels of investment in Fintech have enabled the industry to develop agile solutions predominantly in the data space – a challenge banks and financial institutions are now facing. Greater reporting requirements and higher regulatory standards have been the main concern for banks and financial institutions, as any failure to comply may, and has been seen to, lead to the imposition of hefty fines. Fortunately, technological advancements have aided both regulators and financial institutions to overcome inefficiencies in obtaining data for compliance programs, managing risks, and trade surveillance.
What exactly is RegTech and why is it essential for the financial services industry?
In simple words, RegTech is the use of technology to facilitate the delivery of regulatory requirements. In pairing up with RegTech companies, financial institutions have a more reliable means of delivering data and analytics to industry regulators, satisfying their, often onerous, demands, a good example of which being timely and accurate data reporting. The following aspects typically characterise RegTech:
• Agility – Cluttered and intertwined data sets can be de-coupled and organized through ETL (Extract, Transfer and Load).
• Speed – Reports can be configured and delivered more quickly.
• Integration – Solutions can be integrated and delivered much faster
• Analytics – RegTech uses analytic tools to mine complex, large data sets and use them for multiple purposes.
How does RegTech benefit regulators and why are they pairing with RegTech companies?
Given the characteristics and the fast-paced nature of the financial services industry, the UK government gave a budget to the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to find ways to support new technologies to help facilitate new regulatory requirements. This allowed regulators to better support the burgeoning RegTech community by providing expertise on what is expected by the UK regulatory framework. In return, regulators receive data from RegTech platforms in a format that is easily usable through an automated and efficient process.
One real-world example of regulators benefiting from RegTech is real-time transaction reporting. Trade reporting was previously a time consuming, intensive and often expensive task as banks used different systems, and each system had its own way of handling and reporting transactions. RegTech companies were able to harmonise this reporting process making it far simpler for regulators to obtain transaction reports from institutions.
How can RegTech benefit financial institutions?
Equally, banks and other financial institutions benefit from RegTech through automation of their compliance and risk programs. Using RegTech, institutions can track any suspicious activities and market abuse from their early stages. This can be achieved by automating the reporting process, allowing global banks and financial institutions to manage their risks of misconduct in real-time by accessing data quality and analysing behavioural signs, avoiding any fraudulent activities.
Risk managers and hedge funds use RegTech companies to collate and calculate their institution’s risk exposures on a global level. In this way, they are better prepared to tackle any firm-threatening problems that might arise. Furthermore, the imposition of fines due to breaches of regulation can be avoided since hedge funds can track investment restriction breaches and shareholding disclosure requirements by cloud-based technologies.
RegTech also provides the technology to pull, consolidate, and manipulate existing systems and data, and produce and report regulatory data in a more cost-effective, flexible, and timely manner. This is vital across the financial services industry, as firms and financial institutions are under increasing pressure to meet deadlines imposed by regulators. For example, with the introduction of EMIR in Europe and the requirement to report trades to trade repositories on a T+1 basis, most of the major players in the industry have developed IT solutions. These deliver straight-through processes, enabling timely trade reporting, thus increasing speed and efficiency, while reducing the possibility of human error through manual interventions.
The way forward
Banks and financial institutions need to understand the benefits of collaborating with technology innovators instead of competing against them, this being the only way forward given the constantly evolving regulatory landscape. Outsourcing responsibilities to RegTech companies will allow banks to focus time and resources on what they do best, making banks more profitable and efficient. Likewise, the transparency, flexibility, speed, and automation offered will enable regulators to monitor the activities of the industry and act on potential threats in almost real-time. Banks and regulators are beginning to realise the benefits of RegTech companies, and instead of resisting their integration, should accept and become a part of the shift in industry norms.