Regulation 

Working with RegTech firms

Working with RegTech firms

In his 2016 state of the union address, then-US president Barack Obama famously said: “Food stamp recipients didn’t cause the financial crisis; recklessness on Wall Street did.” Since 2008, regulators have been trying to plug the gaps that caused the crash, using two main approaches – massive fines and masses of new regulation. 

The implications of the fines are clear enough, with calculations running to more than $300bn (£238.8bn). While this is a pretty big stick with which regulators have sought to punish the industry, in many cases the reams and reams of new regulation has caused a bigger problem.

Despite being drafted with the best intentions – of correcting poor behaviours and protecting consumers – regulations are often long-winded, technical and lacking clear and measurable outcomes.

In order to deal with this outpouring, global financial services firms have hired hundreds – in some cases thousands – of additional risk and compliance professionals. One of their key jobs has been to support the enormous translation exercise required to make sense of what the new regulation means for their businesses.

Thankfully, relevant technology has made great strides in the past few years. Taking a lead from translation services such as Google Translate, firms are now looking to use the various technologies associated with artificial intelligence to translate the language of regulation and compliance into something easier to understand. Many of these firms have badged themselves as RegTech companies. 

Key Points

  • Regulation to prevent another financial crisis is often longwinded.
  • Artificial intelligence is being introduced that could help interpret new regulations for compliance reasons.
  • Compliance staff are not necessarily aware of the detail and restrictions of operational processes or technological systems.

I define RegTech solutions as being those that either solve challenges associated with a particular highly regulated activity, or those that improve the management and implementation of compliance within businesses.

In its broadest sense, the term covers everything from identity management and reconciliations software through to advice process management and risk and control framework software. Importantly, understanding what the regulator requires is at the heart of all these areas.

The first step for firms is to be able to reliably collate the requirements that relate to them. With regulation coming from the FCA, PRA, the Pensions Regulator (TPR), HMRC, HM Treasury (HMT), the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to name but a few, there are a multitude of acronyms to keep your eye on. All of these organisations have different publishing schedules and approaches, which results in big overheads for financial services firms. 

Luckily numerous technology providers are looking to include functionality in their systems that monitor and consume the output of these organisations. This gives firms a central repository of documentation relating to their businesses. The monitoring has been enabled by the regulators themselves and has become more consistent in output.

The FCA, for example, publishes all of its new consultations and discussion papers on a central searchable web page. The collection of handbooks is also available as a set of time stamped data, which means solutions can be built that rely on this data structure and availability.

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