Regtech and roll
25 May 2016
Regulators must encourage innovation in asset management to make compliance easier for everyone, says Confluence’s Nicola Le Brocq
Image: Shutterstock
The monitoring of systemic risk and data-driven regulatory oversight are two of the most prominent and growing trends within the current global regulatory arena and, to a certain extent, they’re intrinsically linked together. In relation to the latter, data-driven/machine-readable reporting is gathering momentum at an astonishing pace.
What is less surprising though is where it comes from. The 2008 financial crisis, the compliance failures at firms and the internal deficiencies highlighted during regulatory examinations have all contributed to more and more demanding oversight requirements. But the largest firms that have suffered severe penalties for non-compliance have responded by significantly growing their compliance department staff, something that does add to the cost but doesn’t necessarily produce a better compliance function.
Similarly, the global focus and concern in relation to liquidity within the markets, as well as the recognition and subsequent evaluation of non-bank systemically important financial institutions (SIFIs), also had a part to play in the push for more adequate monitoring of systemic risk. Regulators are concerned that the modern day structuring of financial instruments has been less than transparent. The result is a general undertone that no one really understands what is lurking beneath. And arguably, rightly so.
Compliance monitoring and quantitative analysis are two different things, and as we observe this shift to more quantitative-based regulatory oversight, the function of compliance needs to adapt.
Increasingly, the regulators and the regulated are embracing the ideology that technology can work for them to alleviate the pressure, especially in this new data-driven/machine-readable world. This has led to the emergence of ‘regtech’, a term that has become more widespread since its first use at the International Organization of Securities Commissions 40th Annual Conference in June 2015. Key regulatory authorities and industry leaders have since then been talking about regtech as the new phenomenon that could help in solving some regulatory problems.
In support of regtech, regulators have openly communicated their wish to support digital markets and financial innovation, obviously with a caveat that providers must demonstrate ability to improve fairness and transparency.
Going forward, using technology to implement more efficient processes for data-driven monitoring and machine-readable filings should be a strategic objective for controlling compliance costs. It should also be used to mitigate against the cost of noncompliance due to human error from manual workflows. The latter is trending right alongside regtech within the industry. The realisation is that asset managers have everything to gain from embracing the technology shift in order to comply more accurately and quickly, which in turn reduces operational cost. Technology will therefore become a crucial tool, and the firms that provide it will now be seen as strategic partners.
The notion of regtech works both ways, too. While the industry is actively searching for more efficient and appropriate systems and processes to deal with regulation, the regulators also recognise the need to become much more tech-savvy in order to manage the data requests and understand and assess the financial technology space. Of primary concern to the regulators is how to handle the submission of data-heavy files, to then manage and deliver the data analysis. The crux of their supervisory role has shifted on the back of the two trends discussed here and has now become a more quantitative role compared to the historically more qualitative desk-based supervision. A perfect illustration of this is the UK Financial Conduct Authority’s (FCA) recent launch of a dedicated working group to look closely at regtech and the flurry of ‘fintech’ innovation within the financial services industry.
Embracing digital and fintech disruption is the building block for implementing cultural and behavioural changes. Asset managers are beginning to recognise that the necessary data gathering is valuable for their own internal management information, corporate strategy and objectives. Similarly, regulators can find ways to link the data submissions to more efficient supervisory processes. Scoping out and implementing technology will help them achieve their regulatory objectives to monitor global systemic risk and improve cross-border communication and information flow between agencies.
In addition to their supervisory activities, regulators are accepting the role they play in better understanding the technology start-ups in their jurisdictions, in order to identify their regulatory status quickly, provide clear guidance, and help them go to market faster with these efficiencies. This will assist wider government and economic initiatives, and drive innovation.
What is less surprising though is where it comes from. The 2008 financial crisis, the compliance failures at firms and the internal deficiencies highlighted during regulatory examinations have all contributed to more and more demanding oversight requirements. But the largest firms that have suffered severe penalties for non-compliance have responded by significantly growing their compliance department staff, something that does add to the cost but doesn’t necessarily produce a better compliance function.
Similarly, the global focus and concern in relation to liquidity within the markets, as well as the recognition and subsequent evaluation of non-bank systemically important financial institutions (SIFIs), also had a part to play in the push for more adequate monitoring of systemic risk. Regulators are concerned that the modern day structuring of financial instruments has been less than transparent. The result is a general undertone that no one really understands what is lurking beneath. And arguably, rightly so.
Compliance monitoring and quantitative analysis are two different things, and as we observe this shift to more quantitative-based regulatory oversight, the function of compliance needs to adapt.
Increasingly, the regulators and the regulated are embracing the ideology that technology can work for them to alleviate the pressure, especially in this new data-driven/machine-readable world. This has led to the emergence of ‘regtech’, a term that has become more widespread since its first use at the International Organization of Securities Commissions 40th Annual Conference in June 2015. Key regulatory authorities and industry leaders have since then been talking about regtech as the new phenomenon that could help in solving some regulatory problems.
In support of regtech, regulators have openly communicated their wish to support digital markets and financial innovation, obviously with a caveat that providers must demonstrate ability to improve fairness and transparency.
Going forward, using technology to implement more efficient processes for data-driven monitoring and machine-readable filings should be a strategic objective for controlling compliance costs. It should also be used to mitigate against the cost of noncompliance due to human error from manual workflows. The latter is trending right alongside regtech within the industry. The realisation is that asset managers have everything to gain from embracing the technology shift in order to comply more accurately and quickly, which in turn reduces operational cost. Technology will therefore become a crucial tool, and the firms that provide it will now be seen as strategic partners.
The notion of regtech works both ways, too. While the industry is actively searching for more efficient and appropriate systems and processes to deal with regulation, the regulators also recognise the need to become much more tech-savvy in order to manage the data requests and understand and assess the financial technology space. Of primary concern to the regulators is how to handle the submission of data-heavy files, to then manage and deliver the data analysis. The crux of their supervisory role has shifted on the back of the two trends discussed here and has now become a more quantitative role compared to the historically more qualitative desk-based supervision. A perfect illustration of this is the UK Financial Conduct Authority’s (FCA) recent launch of a dedicated working group to look closely at regtech and the flurry of ‘fintech’ innovation within the financial services industry.
Embracing digital and fintech disruption is the building block for implementing cultural and behavioural changes. Asset managers are beginning to recognise that the necessary data gathering is valuable for their own internal management information, corporate strategy and objectives. Similarly, regulators can find ways to link the data submissions to more efficient supervisory processes. Scoping out and implementing technology will help them achieve their regulatory objectives to monitor global systemic risk and improve cross-border communication and information flow between agencies.
In addition to their supervisory activities, regulators are accepting the role they play in better understanding the technology start-ups in their jurisdictions, in order to identify their regulatory status quickly, provide clear guidance, and help them go to market faster with these efficiencies. This will assist wider government and economic initiatives, and drive innovation.
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