Since the financial crisis, we have been gifted over two Eiffel Towers high worth of complex and costly financial regulation, ever increasing in quantity and intricacy. Boards struggle to formulate their strategies to deal with regulatory-driven change to their operating models. There are answers, and now is the time to flush them out – before the flood hits.
The 2017 all-star view
On 28 February, at our 300-delegate RegTech event in London, we are opening the debate with an all-star panel on the politics of RegTech. Why? Because, if we are ever going to take a global system of FS rules and make sense of them, we are going to need to cross a lot of boundaries and perform unnatural acts of collaboration. Who will need to be involved? Practitioners, from financial institutions, standards bodies, the digital supply chain and, of course, regulators.
As we have argued on these pages for years, to get up the RegTech mountain we need to get beyond the politics of RegTech and agree how we will use ‘tech’ to solve ‘reg’ problems. To do this, we need to share commonly understandable artefacts that don’t exist today: models – to help the machines understand how a trade repository and SDR are semantically related; code – to allow the machines to ‘talk’ to the regulators and guidance on what standards apply – so that what is visible at a systemic level does not result in ‘Garbage in Gospel out’.
Yeah, yeah … why do it differently now?
As anyone involved in the detail knows, it sounds a lot easier than it is in practice, but collaboration can work and the conditions for it are looking better than they have in years. Why? Quite simply, political pressures are going to cause the dam containing this reservoir of financial regulation to burst. Connect the dots: Brexit will phase in at the same time at Dodd-Frank rewrites … and we will be just getting through 18 implementation programmes – including a complete rewrite of how the EU market works in MiFID II.
Brexit and RegTech – the mother of all change programmes
As the chart shows, we need to begin to scale the mountain to avoid the flood this year, while we still have budget to complete a very large portfolio of regulatory change work. But wait, this is a good news story: we have the budget, the business case and the answer – all we need to do is make it happen!
The climb will be steep and arduous and, as we stand at basecamp and pack our bags, we must decide what we will carry ourselves to ease the struggle and what can be shared out. Complex and inefficient regulatory preparation will cause problems for the ascent and collaboration through standardisation is the best way to ensure that we are packed as efficiently as possible.
How deep is the water?
The demands of financial services regulation are becoming increasingly unmanageable due to the scale and complexity of requirements, with over 600 legislative initiatives in the G40+ to consider since 2009. Citi’s Digital Disruption Revisited report cited a McKinsey study that estimated the cost of managing the regulatory environment to be more than 10 percent of all operational spending at major banks, or $270 billion per year. Is it any wonder that IT and operations barely have their heads above the water?
The large number of requirements that the industry must contend with are often overlapping, unclear or open to interpretation. Regulators are pushing hard to standardise data fields but, across the globe, the challenge is immense and far wider than just reports about OTC products.
This leads to each firm approaching compliance differently as they interpret the regulation, reach solutions and then find software to cope in their own way. As the approaches are varied, systems and databases are developed in a haphazard manner, not only incurring additional costs but amplifying the risk of misunderstanding the regulation – which could mean hefty fines.
Where some information sharing has occurred in the front-office – in electronic trading for instance – and we have seen innovation in agreeing data formats, the same standards have not been reached in the back-office. There needs to be consistent and open data standards and data exchange between firms and regulators. Without shared models, code and guidance, there is little safety and, besides, bespoke solutions to regulatory burdens are expensive. It is a resource drain that simply cannot be borne on the ascent up the mountain.
Standards: not a zero-sum game
Although one might argue that practical standardisation, in the form of code and models for example, is proprietary, the reality is that neither the customer nor the rest of the supply chain will thank you for taking that stance.
There is little competitive advantage to be gained through varying solutions to compliance regulation, particularly in data standards, and firms have already shown a desire to collaborate in regulatory areas to increase safety and reduce the chance of penalties.
Put another way, trying to scramble up the mountain alone is significantly less effective than moving with a pack that wants to share the load. There is a lot to be said for safety in numbers and regulatory involvement in the climb.
Will it take more time to organise a climbing party? Of course! Will we get more out of it if we do? Absolutely! The long-term efficiencies of standardised code, guidelines and models certainly outweigh the initial costs.
Conclusion: this shouldn’t be that hard
As this quick recap demonstrates, standardisation shouldn’t be that hard.
In fact, the kinds of standards we are talking about have already been introduced in many other sectors. In pharmaceutical and automotive industries, for example, standards are applied and firms all use the same data protocols so that the data from each can be used.
Ergo, the approach we are recommending is not that scary. In fact, it is the one that our customers have already followed. Are they as complicated, global and fast moving as finance? Probably not. Is RegTech now ready to get us the tools we need for the ascent? Definitely. And, more importantly, if we do it right we can be safer, more efficient and carry less risk. What’s not to like about the business case for RegTech standards this time around?
Regulation of the financial sector is necessary and highly unlikely to disappear anytime in the conceivable future and, as technology develops and innovation occurs, regulation will inevitably expand to account for it. Therefore, our solutions must adapt, through efficiencies that can be achieved with collaboration and uniformity, moving forward together to solve common costly issues.
How is JWG helping to get out of basecamp?
To deepen the discussion on RegTech, JWG will be running a series of new special interest groups, covering:
- Trade surveillance. What can be traded, where it can be traded, which types of firm can trade it and what systems are needed to do so
- Client management. The holistic obligations of KYC regulations on client data
- Reporting and reference data. Reporting to regulators including, but not limited to, transaction reporting formats, standards, collection mechanisms and holistic data models
- Data and security. Data security, privacy and associated technology risk and risk data requirements from a wide range of regulations.
If you would like to find out more about the groups, please contact firstname.lastname@example.org.
Stay tuned as we continue to delve into what the thought leaders are saying in the run-up to our 28 February 2017 conference. If you are not one of the 300 registered, come and join JWG and those in the know, here http://regtechconference.co.uk/register/.