Date: April 2016
Dear fellow board members,
As the Financial Conduct Authority’s acting head has so rightly pointed out, sustainability is the key to pleasing our shareholders and delighting our customers with a global approach to compliance.
Since taking the seat which oversees our global compliance function in 2008, I’ve watched in horror as G20 regulators increased their document output by 500 percent and left us with a regulatory document pile well on its way to three Eiffel Towers high by 2020.
I have been shocked by the sheer complexity of the overlapping and, at times, conflicting post-crisis regulatory frameworks which have arrived well behind schedule and forced us into one reactive regulatory project after another.
This firm is not alone in its regulatory challenge – the highest levels of the public sector have recognised that a more effective approach to compliance is required but, like me, have struggled to see what can be done differently … until now.
Keeping in mind our last cost/income ratio discussion, I investigated the FCA’s call for input on ‘RegTech’ and attended a firm only roundtable run on their behalf by JWG. I was shocked to find the market for IT solutions for regulatory reform is equivalent to 0.7 percent of UK GDP (based on JWG analysis of FinTech futures report figure: £319 billion IT spend on financial services**). This is clearly a market failure, but the regulator is, at long last, engaged in the problem and starting to do something about it.
The FCA’s recently announced 2016/17 business plan recognises that innovation and technology, as one of its seven key themes, are key to reducing our regulatory burden. The plan is for the regulator to support RegTech that enables more efficient and effective regulation and compliance.
It recognises that technology is bringing opportunities, as well as threats, and that firms need to focus on both their infrastructure and their culture to ensure they are ready to adopt these technologies. It is clear that collaboration across public and private sectors will be needed.
Looking down our list of regulatory programmes in markets (e.g., MiFID, EMIR, SFTR, benchmarks), risk (e.g., Solvency II, CRD IV, FRTB) and operations (e.g., BCBS 239, SMR) convinces me that we have little time to decide what our RegTech strategy is before we are caught writing more big cheques to fund reactive programmes.
RegTech is a simple concept, using technology to solve the problem described above, but the RoI is measured in thousands of percent. My three key takeaways at the roundtable:
- RegTech is just as much about managing the obligations as it is the blockchain;
- Other firms have made strategic investments to get the foundations for it in place; and
- It requires a collaborative approach across the industry.
It was refreshing to hear the experts all say that we need to digitise the entirety of the regulatory texts to classify and route granular requirements to our own SMEs in the front, middle and back-offices and to the suppliers we rely on.
As you heard at the last meeting, the timetable for MiFID II is in disarray, but this will work to RegTech’s advantage and allow us to lay the foundations this year so we can quickly bolt-on sustainable solutions in time for January 2018. Distributed ledgers, semantic models, open data, artificial intelligence can all help us, but only if we point them in the right direction.
To get this right, we need to agree a clear strategy and roadmap. As every corner of the organigram is impacted, I suggest that we form a taskforce, with front, middle and back-office leadership, which will report to you directly on our RegTech approach, and ask this group to address:
- Business focus: Which of our businesses are impacted and require RegTech support most urgently? What parts of the middle and back office are presented the biggest opportunity from early adoption of these technologies?
- Landscape assessment: What initiatives are our SMEs engaged in which require our support? One example is the MiFID Implementation Group, which has added RegTech to the agenda as it addresses trading, investor protection and reporting. What other new ones are required?
- Business case: Who will own transformational solutions like the ‘robo rulebook’ that transform the way we look at how our operating model meets regulatory obligations?
- Regulatory engagement: How do we work with the global regulatory community on these types of initiatives?
- Education: I struggle to decode the three, four and five letter acronyms these days. How do we bring our ever junior workforce up to speed and enable them to catch it all quickly?
Thank you for agreeing to put a 30-minute slot on the next meeting agenda. I will assemble the heads of operations, technology, finance and strategy, together with key business stakeholders, to establish our 2016 targets and deadlines, and send briefing papers in advance.
PJ Di Giammarino
Managing Director, Compliance, UK Bank*
This piece was previously published on Thomson Reuters Accelus
About the author
*PJ has never been a compliance officer but he has been a global COO for technology at a major bank before founding the regulatory think-tank, JWG Group on the back of MiFID I ten years ago. After five years of development, JWG launched the award-winning RegDelta platform to coincide with the launch of the MiFID Implementation Group, and has helped the FCA and other regulators with their RegTech initiatives.
**This figure has been amended subsequent to the publication of JWG’s response to the FCA’s call for input on supporting the development and adoption of RegTech based upon further review of the FinTech Futures report. The estimate was based upon the following passage in the FinTech futures report: “The ever evolving nature of disruptive and emerging technologies means it is impossible to wholly predict the future economic benefits of financial technologies (FinTech). It is currently estimated to generate £20bn in annual revenue in the UK.36 Both the financial services and technology sectors contribute significantly to the UK economy. Financial services paid £65bn in tax in 2012/1337 and account for roughly 9.4% of gross domestic product (GDP) (14.5% including related services such as legal and consultancy38). The UK has the largest financial services sector in the world.39 Similarly the UK’s prominent technology sector contributes enormously to GDP, the internet industry alone accounting for roughly 8.4%.40 Technology and financial services are interrelated, banking and securities institutions spending $485bn (£319bn) on IT in 2014.41 Strength in both these areas may help to build a sector which broadly encompasses both financial services and technology, although these individual strengths may not guarantee success in FinTech.” Our initial estimates were based on the premise that this was a UK only figure, however after further analysis of footnote 41, it is clear that this is a global figure. For this reason, the figure has been revised as stated above.