Regulations come too fast, organizations change too quickly and there’s just too much happening in finance to address regulations with manual processes, according to TABB Group’s report "Financial Markets: Embracing RegTech".
The numbers around regulation are staggering. “The largest financial institutions can spend over $1 billion a year on regulatory compliance and controls while the average financial institution dedicates 10-15 percent of its staff to this area,” according to the report. Past practices — manual work siloed along geographic, asset or lines of business won’t work at this scale. JWG, a London regulatory think tank estimates current regulations if stacked would reach 3X the height of the Eiffel Tower
Big financial institutions have to overcome some self-inflected problems that regulators permitted — many of them have grown through acquisitions without ever integrating the back office systems that support their business, risk management and their compliance. As TABB analyzes the issue: “many of today’s large banks are the product of multiple mergers over the last 30 or so years, they are saddled with complex and redundant legacy infrastructure that may not have been fully integrated.”
Meanwhile, the onslaught of regulations continues. TABB says that “Between 2009 and 2014, regulators published over 50,000 documents — compared to about 10,000 the previous five-year period.”
JWG, a regulatory think tank in London says the regulations would equal the height of three Eiffel Towers. PG Di Giammarino, CEO of JWG, says financial institutions have to find a way to bring technology into regulatory technology because there aren’t enough skilled people to hire to do it by throwing more people at the problem.
Getting regulatory compliance wrong can be pricey. TABB cites Thomson Reuter’s estimated that “between 2008 and 2015, regulators have imposed over £235 billion in fines and compensation on the world’s 20 biggest banks”.
For as long as regulations have been streaming at financial institutions the IT and compliance experts have been looking for some way to find a return on their expenditures. TABB takes a shot at possible ROI of compliance.
“At its heart, RegTech is about data and automation, improvement of which can offer significant potential for competitive advantage,” says the report. Others have suggested that compliance could be an opportunity for financial institutions (FIs) to work together or develop a utility for some aspects of compliance.
The report notes that several utilities have emerged to meet the demands of regulatory compliance.
“…MiFID II compliance has spurred a wide share of these, including: - FIX Trading Community standards that relate to protocols for transaction reporting, aimed at banks - JWG RegData, a regulatory data management platform aimed at asset managers and banks - Project Sentinel, a multi-bank consortium to create a normalized regulatory data model for over-the-counter sales and trading requirements, aimed at regional banks.”
TABB concludes with a call for the industry to work collaboratively on meeting regulations.
“Unlike some FinTech-based utilities which require industry-wide adoption, and so pose a ‘first-mover disadvantage’, RegTech collaboration across parties including regulators, solution providers and banks, can bring immediate and significant competitive advantage to early movers.”
One source of competitive advantage in compliance could come from achieving compliance at less cost than competitors. Once again some of the number are staggering. TABB says “The complex modeling and extensive record keeping requirements of regulations like comprehensive Capital Analysis and Review (CCAR) stress tests and Fundamental Review of Trading Book (FRTB) represent a step change in the amount of compute and storage resources needed.” Cloud offers a way to obtain massive storage relatively inexpensively and huge compute power on a short-term basis. For example, capturing voice recordings can take up three terabytes for just one day’s calls.
TABB also sees roles for artificial intelligence (AI) and robotic process automation (RPA) as tools to develop cost-effective solutions.
TABB Group says the banks could see benefits from improving their processes to comply.
“Middle and back office processes can become more efficient through improved workflows and standardized and integrated approaches to data handling, which can raise service levels. Improved customer metrics around services, transactions and risk can allow firms to focus on the most profitable accounts.”
TABB offers an intriguing possibility: “TABB believes some firms might explore regulatory arbitrage within investment strategies, and these strategies will need to be informed by RegTech offerings.”
The report was written by Monica Summerville, TABB Group’s London-based senior analyst with TABB Group FinTech research head Terry Roche, head of fintech research at the group and senior analyst Dayle Scher in New York.
“It is an exciting time for regulatory compliance as a virtuous circle of RegTech, cloud and the financial services market helps transform compliance from a cost to profit center,” Summerville.
Then again, excitement isn’t always considered a good thing in financial services.
