By Senior Management at financial institutions more than ever before is in need of understanding the trends that shape the industry. In an always more complex world, the developments that define success and failure might be evident but still difficult to interpret.
Financial technology certainly is one of the great trends that has transformed financial services but not only in the application of new payment systems, robo-advisory, budgeting apps or crowdfunding, to name just a few. It is the wider application of innovative technology like data analytics, artificial intelligence or cloud computing that touches upon all areas of finance.
This holds also true for the management of regulatory obligations and compliance. RegTech (as in Regulatory Technology) is the magic word that promises the solution to banks’ billion-dollar problems and huge amounts are invested in firms developing RegTech solutions.
Still, as with Fintech, RegTech spans across various areas and business aspects, so it is not enough to simply understand the importance of RegTech in general. Instead, a more refined knowledge of the key trends for the foreseeable future and beyond is what senior management needs in order to make informed decisions.
Regtech is now mission critical for financial institutions as they continue to grapple with the bombardment of costly and complex financial regulations. Huge amounts of money are being invested in regtech companies as the demand for efficient technology and solutions take on a life of their own.
To put some perspective on where the industry is heading, the following insights from top industry experts highlights the top ten trends and possible impact on the regtech industry and regulatory reporting communities over the next year and beyond.
Outsourcing Reporting – Set to Grow Further in 2020
Cost sensitivity and better risk controls are increasing the outsourcing trend, as regulatory reporting is deemed a non-differentiating cost. All firms share the life cycle of preparing, validating, and distributing data, and optimizing data manipulation is key to controlling spiraling regulatory costs. As the regulatory requirements have increased across jurisdictions and assets, there are recurring technology requirements that can address multiple regulations, and the scale of solutions built specifically for the repeat challenges increase the ROI. Thus, the move towards using vendor solutions for this purpose will increase in 2020, as the realization that internal reporting solutions don’t provide any competitive edge nor does the increased cost of doing it inadequately provide any benefit.
Reporting – The Need for Increased Data Quality
There will be a significant requirement to improve the quality of reported data across various regimes and jurisdictions. So, firms would expect far greater data scrutiny, regulatory attention and enforcement actions.
Operational Resilience & Data Quality
Major themes for 2020 and beyond will include continued focus on data quality and new, higher-order regulations governing how firms control their data end-to-end, especially where external partners form part of the reporting chain.
Resilience will demand that your firm’s reporting function have controls in place to prevent impacts they might not have introduced themselves, such as change management regression, third party-failures and/or application failures.
Focusing on Reporting Performance and Data Analytics
The key challenges for firms in 2020 and beyond will be to maintain the level of focus in the system implementation and governance frameworks that have been put in place to ensure that known errors are remediated, reporting performance monitored, data analytics controls are put in place and remediation undertaken to correct past mistakes.
Regulators would continue to raise data quality concerns in public with common themes hence firms would benefit from putting controls in place to capture these and other less transparent issues ahead of the Regulator doing it for them. Tools are becoming available to do this in a regular, repeatable and cost-efficient manner and firms should deploy these and follow up on issues raised in order to not fall foul of regulatory censure.
Balancing Privacy with Surveillance
The tightening of regulations has seen an increased obligation for financial services companies in providing greater visibility into their operations. Undoubtedly firms will need to tread a thin line between privacy and business requirements when it comes to data processing, storage and investigation. This is particularly tough on trading, risk-management and research desks – all of which rely upon personal relationships and will often see business and personal information shared in mixed conversation. This will open the space for behavioural-based AI platforms that can analyze each communication and focus only on the important data.
Crypto & the AML Regulation
The impact of crypto cannot be over-emphasized. However, a key regulatory focus would have to be on crypto firms to implement Anti Money-Laundering controls. In addition, a global trend will be seen where regulators and law enforcement start to peer through the fog of pseudonymity, both by the use of blockchain monitoring tools and by the widespread implementation of the FATF Travel Rule, whereby crypto transfers need to be accompanied by disclosure of the beneficial owner both at point of origin and receipt.
Best Execution Data – Time to Sharpen the Focus
Regulators are likely to refine their expectations of firms and focus on the key reasons for the requirements in the first place – transparency and better outcomes for consumers in terms of informed decisions and trade execution. The additional dimension will be how firms use the data themselves to analyse and improve their performance. Firms will be expected to demonstrate how they use best execution data to enhance and objectively challenge their published best execution policies as well as how they incorporate the data within their risk management, transaction reporting, treating customers fairly and product governance frameworks. Additionally, firms should be ready to validate the application of their approach across their governance frameworks in the form of meaningful and timely management information and key performance indicators. The importance of robust and bespoke data and reporting solutions will, therefore, be greater than ever.
Retail Investment Compliance
More focus on retail investment institutions will lead to an increase in the digital redesigning of their processes with compliance baked into that process. Risk Tolerance, IPS, and KYC can all be built into one digital customer-facing workflow that cuts out the need for countless administrators and compliance officers. What remains to be seen is if this trend sparks continued process automation, further reducing the number of instances that would require the ex-post application of compliance, and moving to compliance minded customer-centric experience.
The P2P Sector
It may be preferable to talk of concentration rather than consolidation in the P2P sector. Whilst there will be some due to M&A, there will be more due to market exits. This is a natural feature of any emerging market, with a reduction in participants, as the landscape matures. This is due to a combination of competitive pressures, and regulatory challenges. On the regulatory side, there’s an increased move towards institutional money.
M&A consolidation is likely to happen, but there are constraints. The valuations some sellers put on their businesses could do with (significant) reassessment. Firms need to consider what they are actually selling, and what the true price is (buyers, particularly those within the sector, will be less interested in the proprietary IT and the infrastructure). Aligned to the question of ‘what are they selling’ will be the question of risk – buyers will want comfort on the risk profile, and potential downstream liabilities. An effective control framework, demonstrable risk management and robust record keeping will give buyers far greater comfort – and firms will need to be able to evidence this.
Anti-Money Laundering
Anti-Money Laundering (AML) is an area to watch and many regulators, seems to agree. Aiming to improve the quality and qualification of people employed in related areas within the financial sector, regulators across the world are introducing different AML certification exam for those appointed as AML Compliance officers. All in a bid to have many professionals, firms and the industry as a whole in a constant state of adaptation working internally and externally with consultants, regtech and fintech companies to not only comply, but to make the most of these.
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