An unparalleled wave of new regulations has hit the financial industry in the decade that has followed one of the largest-ever global financial crises. FATCA, AEOI/CRS, AIFMD, MiFID, MiFIR, FinSA and FinIA are just a few of the laws and regulations that have come into force or are in the process of being introduced. These regulations are resulting in significant changes in the financial industry. Compliance and risk departments have been greatly expanded in order to address the new circumstances and the changes that are still to come. With the help of solicitors and consulting firms, the industry is preparing for the future.
Laying the foundations for regtech
The economic pressure triggered by margin erosion and low interest rates has forced the financial industry to rethink its operating model. The new and stricter regulations, which are not economic value drivers but instead result in greater outlays, have intensified the above mentioned trend. This, paired with the development of information technology, is an ideal breeding ground for fintech. The traditional value chain of banks has slowly but surely changed as a result of fintech companies’ timely technological support for financial institutions and the continued openness of the latter to outsourcing. As technology creates scalability that reduces costs and saves time, fintech has gradually come to be perceived as a strategic partner for all players in the financial services industry.
As the demand for fintech has grown, regulatory technology has begun to take root in the fintech community. Regtech automates regulatory processes and guaranties compliance with these processes. It uses technology to support the ongoing monitoring of regulations and facilitates the necessary reporting. Regtech also creates transparency and consistency, as well as sustainably increasing the quality of risk management and compliance. Another advantage is greater security arising from the continuous monitoring of processes. Regtech enables the real-time assessment of activities relating to the initiation, establishment and management of client relationships, portfolio allocation, reassessment of transactions and the provision of cross-border services – to mention just a few workflows. These factors are beneficial for regulators, internal and external auditors and those involved in the monitoring activities, while also substantially reducing the cost of assessments. However, regtech’s increasing popularity is not only attributable to the need to reduce costs: it can also help financial institutions on a strategic level, for example when cultivating new markets or client segments.
The magic triangle
When combined with portfolio management systems, regtech offers numerous benefits for intermediaries and multi-family offices, as well as for banks and regulators. The magic triangle – consisting of custodian banks, intermediaries and their regulator – will benefit from the digital developments in the management of future regulatory and compliance requirements.
The integration of technological tools to ensure adherence to compliance and risk-related regulations, designed specifically for independent wealth managers, reduces risks both for custodian banks and intermediaries, for example in the areas of money laundering and know your client (KYC). The use of regtech by intermediaries supports their compliance with legal requirements. Automated compliance and risk management processes and controls that have already been implemented are usually fully documented and can therefore be reviewed at any time. Furthermore, this technology enables all parties to reduce employment costs as a result of the support it provides. This applies not only to monitoring but also to identifying, interpreting and implementing new and revised rules, which can be efficiently addressed by simply updating digital policies.
The magic triangle can be explained using the example of establishing a client relationship as well as client and investment suitability checks. The duties of all parties are simplified when the list of KYC questions corresponds to the regulator’s or banking association’s guidelines. The data can thus be worked into the client’s investment universe and portfolio allocation to ensure that these reflect the client’s risk profile, domicile, knowledge and experience. The supervisory body, custodian bank and intermediary can all then rely on predefined processes and electronically stored information. The audit trail provides an overview of actions and activities at all times.
Regulators promoting the development of regtech
Supervisory bodies in numerous countries are promoting regtech by collaborating with market participants or through partnerships with financial institutions or accelerator programmes. In addition, supervisory bodies in many jurisdictions have provided clarity about what is required from regtech companies in order to comply with regulatory guidelines.
The following is a compilation of regtech-related measures taken by various supervisory bodies:
- Financial Conduct Authority (FCA) in the UK:
TechSprints, a sandbox for testing innovations in a protected environment
- Monetary Authority of Singapore (MAS):
Data Analytics Group, KYC shared services utility
- Securities and Exchange Commission (SEC) in the US:
Further technical development of data collection and processing
- Österreichische Nationalbank (Austrian national bank) (OeNB):
Joint venture of the largest banking groups for reporting
- FINMA in Switzerland:
Sandbox for assessing new business models in a limited scope for conceptual and economic effectiveness and for creating digital interfaces with supervised entities.
The Institute of International Finance (IIF) also recently formed a regtech task force that focuses on the industry, regulators, entrepreneurs and investors who operate in the area of regtech.
Regtech – forward-looking technologies
All risk management and compliance workflows, as well as labour expenditure, in the financial industry that are not part of the core competences of individual financial services providers should and must be processable via centralised solution providers or through platforms that comply with regulations. This will make it possible to establish an industry standard that will result in a maximum degree of scalability and therefore cost efficiency. The biggest advantage of this is that, thanks to increased legal certainty, regulators, intermediaries, auditors, financial institutions and end clients are able to focus on other matters.
Firstly, assessments of auditors, financial services providers and end clients are simplified for supervisory authorities. Secondly, auditors can significantly simplify their regulatory checks for financial institutions. Thirdly, financial institutions can focus on areas that create value and are client-centric. Last but not least, developments in regtech make life easier for end clients because they can be provided with information in simpler and faster ways (e-channels). The amount of (paper) work is also reduced for the client (as well as for the intermediary, the custodian bank or the financial institution) when making changes to the client relationship, such as when opening a new banking relationship or account or when investing in a new risk class, because only the missing details or information need to be provided. All other known information already exists in the digital world and can be integrated seamlessly.
Regtech increases effectiveness, efficiency, security and transparency for all market participants, enabling them to focus on their core competences, safe in the knowledge that they are operating in accordance with the legal and regulatory requirements.