In our previous article, we argued that a number of next-generation technologies have the potential to dramatically disrupt the financial sector’s manual and outdated legacy infrastructure which is, as we write, fighting a losing battle with the ever-growing pile of regulatory rules.
It’s curious. With thousands of actors spending billions on hundreds of technologies – every year – any rational person would presume that someone would have figured out how to clean-up with RegTech by now. After all, we create exchanges, reporting infrastructure, utilities and the like all the time.
But, 6 years into the regulatory cycle, these solutions are still underdeveloped and low on uptake. Despite a lot of talk about them, there is a lack of unified RegTech adoption within the industry. The big question is: why has the ecosystem broken?
JWG’s research for the FCA boiled the barriers to good RegTech down to motive, mandate, complexity and timing. We’ve yet to coin a consultant-like acronym that would strike fear into the hearts of investors, but will recap our initial thinking on them below.
A lack of motive
The first barrier is that the motive for market players to get involved in the formation of a common solution is, for various reasons, obscured.
The majority of financial institutions, when facing fresh regulatory obligations, undertake cost/benefit analyses to locate the most efficient approach to compliance with each individual regulation. Yet the scope of such analysis is limited to a firm’s individual operational response and not that of the entire industry. This restricts their ability to visualise a common solution that would save costs for all regulated firms, such as a broader scope impact assessment that maps requirements from multiple regulations to the different operational areas of a firm that would require change. While addressing obligations collaboratively would clearly save valuable time and capital, the tools currently employed for handling requirements restrict the line of sight to only a short-term response.
In addition, technology vendors who are not shown the feasibility and profitability of a common solution will not have a clear incentive to invest either time or money in RegTech. The benefits of a RegTech-driven approach can only be clearly visualised with a complete view of the regulatory landscape and, as we shall explain further below, complexity is holding this back. Those that do choose to offer RegTech solutions to the market can often end up bogged down in a confusing and drawn out authorisation process, or face up against already well-established relationships between banks and technology providers.
Absence of a coherent mandate
The second barrier – a missing mandate to speak about the solutions – exists because technology providers, firms and regulators alike are unwilling to set up the dialogue around common approaches and solutions. Overcoming this barrier will require a neutral body to facilitate the dialogue and lead the crowdsourcing of the knowledge necessary for RegTech development.
The lack of a clear stance from the regulators on what good solutions look like is leading this stalemate, by creating uncertainty. This is not only discouraging investment and venture capital but more generally holding back leadership on the RegTech agenda. Indeed, a report from the International Institute of Finance suggests that doubt about the views of regulators on new solutions to compliance may be a factor in the inability of RegTech to keep up with the FinTech advance.
It is clear that, without an established set of standards in the RegTech sector, RegTech solutions will appear to remain expensive, complex or risky. JWG’s MiFID Implementation Group (MIG) has made significant headway in providing the preconditions for dialogue by bringing vendors, suppliers and firms to the table to discuss common solutions for MiFID implementation, but it lacks the mandate that could be provided by a more comprehensive endorsement of RegTech.
Innovations like this are taking place all over the supply chain but, without a regulatory rubber stamp, they will remain confined to the corners of the market. Regulators may express their enthusiasm towards the integration of RegTech solutions in the compliance process, but a fear of supply chain disruption due to lack of technical industry knowledge and concerns of overstepping legal mandates prevent them from taking these steps.
Overwhelming regulatory complexity
Thirdly, the complexity of the overlay and interaction of the many regulatory initiatives makes it increasingly difficult to see the bigger picture and adopt common industry solutions. Between 2009 and 2014, regulators published over 50,000 documents, more than a 500% increase compared to the previous 5 years. As it is nearly impossible for one individual to be an expert in all operational disciplines, few have a coherent view of the global banking infrastructure and, as a result, when faced with a series of changes, the markets are starved of deep expertise that can draw the linkages, spot the deltas and explain what they mean.
These difficulties in understanding the impact of multiple interacting regulations block the development of RegTech solutions, which rely on a holistic view of the regulatory response infrastructure.
This can only be achieved through collaboration. Using RegTech tools to focus on implementation requires all stakeholders at the table, as demonstrated, for example, by the MIG’s collaborative development of a common impact assessment on a national, or international, scale. By working together, the participants were able to mutualise an understanding of what a specific regulatory requirement was asking them to do.
Indeed, if regulators were able to recognise common industry interpretations of regulatory obligations, they could take significant steps towards closing the troublesome gap between the setting of requirements and their implementation, and allow potential RegTech providers to easily spot the domains where they can apply their tailored solutions.
Uneven, overlapping regulatory timescales
Finally, the sheer number of reforming regimes across the globe, from a local to a global scale, often results in different regulations sharing similar deadlines and presenting firms with unrealistic timelines for compliance. The complex EU regulatory system inevitably leads to laws being implemented over varying timescales as different countries release their more specific implementing regulations at their own pace.
All this results in both regulators and regulated being in a continual state of reaction to new requirements, leaving little time to focus on the long term response and, instead, only aiming for compliance with the nearest deadline. Interestingly, this issue of poorly sequenced legislation was highlighted by the FCA in their response to the European Commission’s call for evidence on the EU regulatory framework. We hadn’t seen this at the time of our submission, but applaud the sentiment.
Technology providers, firms and regulators all require time to build more efficient, automated, compliance processes yet, instead, the majority focus solely on the next deadline rather than examining the interlinkages between them.
What is needed is the alignment of the timing of regulations using optimisation techniques, so the high costs currently incurred by dealing with regulations one-by-one would be recovered. This issue can easily be addressed when examining regulations holistically, opening up the RegTech market through the easier visualisation of solutions. This would clearly benefit the technology providers, who struggle to keep their services up to date with the continual publication of new regulatory rules across multiple jurisdictions.
Got a catchy acronym for us to describe how to fix all this? We’d love to hear from you. It is clear we have some significant challenges on our hands.
Fortunately, with the right people around the table we can start to stimulate the necessary debate to introduce the standards and tools that make innovation in, and adoption of, RegTech solutions a worthy investment. We’ve been working on ways to get better, faster, cheaper and safer solutions to regulatory problems for a decade and are excited to have almost 20 top banks represented in the debate this month. Stay tuned for the results of our FCA roundtable next week.
Our next article will cover the recommendations, as given to the FCA, that aim to bring down these barriers and create a clear view of the RegTech marketplace. By discussing these together, it may be possible to realise RegTech’s true potential and alleviate the huge regulatory pressures on the entire industry – and more broadly – by creating a more streamlined, automated, efficient and compliant, financial ecosystem.
The story won’t end there, of course … stay tuned and sign-up here for alerts.