With the economic crisis of 2008, regulatory agencies across the globe realized the loopholes and systemic risks in the financial system. The post-Dodd-Frank era, consequently, has been witnessing increased regulatory requests for providing timely, accurate and precise reporting.
Though there has been a consistent increase in the quantum and intensity of regulatory requests, it wasn’t until 2013 when the Basel Committee issued its principles for effective risk data aggregation and risk reporting that a formalized point of reference became available.
Estimates peg the increase in regulatory changes between 2008 to 2015 at 492%, especially in anti-money laundering (AML) and customer protection. The cost of non-compliance has become steeper too with leading global banks have paid more than USD 5.7 billion in non-compliance fines in 2015 alone. 87% of CEOs and CCOs of leading banks and financial institutions (FIs) fear over-regulation as a threat to their organization’s growth.
FIs are struggling to keep up with the umpteen asks from regulatory agencies and the multitude of reporting requirements. As a result, they are turning to digital technologies to meet these demands aimed at fighting financial fraud and crime.
The Emergence of RegTech
In response to the new regulatory environment, a new stream called Regulatory Technology (RegTech) has emerged. RegTech is a fast-growing field and is slated to reach USD 120 billion by 2020.
In a short span of time, RegTech has helped organizations analyze vast amounts of data and report them to regulators in a structured manner.
Though the use of technology is not alien to Banking and Financial Services, most banks and FIs are constrained by legacy solutions. These comprise of multiple applications patched together over years of mergers and acquisitions, integrated haphazardly across jurisdictions. These solutions lack agility and flexibility as they were built for specific regulatory requirements and enhancements require development effort.
Some of the areas where RegTech can contribute to reducing the burden on Compliance Officers are:
- Liquidity reporting obligations along with liquidity ratio calculations required daily.
- Disclosures of counterparty exposures and institutional structures stemming from financial stability regulations.
- Analysis of risk data and qualitative information arising out of stress-testing and risk-assessment regulations
- Trading surveillances arising from personal trading/employee trading regulatory restrictions
- Automation of legacy processes
- Interpretation of legislation
- New surveillance and monitoring processes including voice, chats, emails and timely reporting
- Managing and processing data
- Mandatory AML (Anti-money laundering), KYC (Know Your Customer), CDD (Customer due diligence) checks and de-duplication.
- Fraud management including payments, online trades, behavior profiling!
RegTech is an amalgamation of best practices from the fields of Machine Learning, Artificial intelligence, Big Data Advanced Modeling, Predictive Analytics, and Automation and has the potential to save billions in compliance costs. It interweaves innovation and robust technology capabilities and regulatory know-how to address FIs’ compliance needs.
The greatest advantage of RegTech solutions is that they are configurable, nimble, easily integrated, secure, reliable and cost-effective.
How Analysts Can Help
Analysts, with its superior prowess in applying modern cloud-based computing technologies, Big Data and Advanced Analytics has applied its learnings across industries to create RegTech solutions which make compliance less complex and capacity-intensive.
Along with our obvious strengths, our proven track record ensures:
- Short implementation time frames
- Flexible, timely, reliable and efficient harnessing of data and existing systems for compliance; negating the need to replace legacy systems
- Customizable solutions with easily configurable new services or features
- Quick configuration and customization of compliance reports
- Data management and control
As RegTech continues to grow, regulators across the globe are also taking note and exploring ways to harness it so that regulators and FIs are connected in a manner that enables real-time compliance instead of post-fact.
They are now moving towards standardized digital transaction reports which they can analyze to spot bank fraud, financial crime and above all, systemic risk. The Financial Conduct Authority (FCA) of the UK is trying to bring together market participants to work on shared challenges and leverage RegTech as a catalyst to manage risk. In Asia, the Hong Kong Securities and Futures Commission (SFC) has launched a pilot project with 20 banks to monitor and detect systemic risk using RegTech.
In short, RegTech is now becoming vital to the continued competitiveness and survival of FIs.