5 quarters ago I was pleased to report that the industry had taken an important step out of base camp.
On the eve of our 2019 conference it is clear that regulators, firms and the vendors which support them have all continued up the RegTech mountain, but we are at a crossroads. New demand mounts from all sides, but it remains to be seen whether the next steps in our journey towards a safer financial system will be taken with RegTech as part of the roadmap.
JWG is proud to have THIRTY SMEs from 18 financial institutions and regulators covering the highest priority challenges for the board today along with 200+ colleagues on 7 June in London. This article summarizes what we have learnt from our preparations thus far and what are we most looking forward to learning about the boards’ agenda.
What’s the question?
As the RegTech council has recent noted: RegTech is profoundly changing the relationship between firms and regulators. The process of digitization requires new levels of collaboration and its consequences will alter the way in which regulation works in practice.
We believe the industry faces a crossroads. One well-worn path will be BAU. The other will be deployment of new technology to regulation-related activities in order to shift them from analog-era to digital and computational models. Which path is your regulator, firm or supply chain following?
What is the board’s position?
As we have described, the demand is ever growing, ever more systemic, more technical and, perhaps most importantly, the consequences for non-compliance are going up.
These consequences are no longer just regulatory, they include the shareholder as ESG questions may well be considered by investors. Whether you work for a regulator, financial institution or technology supplier you are wrestling with the same RegTech questions: what is our strategic objective, who owns it and how do we ensure that the requisite controls are in place?
Going into 2020 we see 5 clear warning signs for the current RegTech board agenda:
- Firms and regulators are currently lacking board–level oversight of compliance capabilities (including RegTech)
- Firms are at risk of not meeting existing regulatory requirements with uncertainty as to the consequences of that being the case
- New technologies with the potential to improve compliance and achieve long term savings are reserved for ‘sandboxes’
- The bigger business cases which justify RegTech require a significant shift in the tone from the top, in both the private and public sectors
- There is a disconnect between the ‘change the bank’ regulatory spending and the ability to process skyrocketing BAU noise levels.
Whilst even 18 months ago it may have been fair to say that a more important reason for the lack of investment in new technologies was a lack of maturity in said technologies now that picture is much less clear. With more and more firms, as well as now even the regulators themselves in some cases reporting at least partially successful implementations of technologies ranging from voice-to-text to machine learning to natural language processing this argument becomes far less convincing. The large number of firms remaining unwilling to invest are risking being left behind.
The big themes for 2020
Our all-star panelists will be wresting with their areas of expertise and teasing out the key questions throughout the day:
- Policy. Will next generation policy finally focus on ensuring the market has the quality data required to achieve the policy objective (e.g., transparency, protection of the system)?
- Standards. Will digital regulators move beyond technology agnostic assessment of performance (e.g., producing the weekly report by hand is a high-risk practice)?
- Incentives. How will investment in good RegTech be incentivized (e.g., will capital ratios be lowered)?
- Planning. How does a board collectively address the enormous breadth and depth of regulatory obligations and who does it hold accountable?
- Collective action. How are regulators and regulated organizing to make the sector safer?
Of course, as Chair I get the hard job of helping to find the wood through the trees as we walk through the hot themes for 2019 which are sumarised below.
Key issues here in 2019
Each panel will be wrestling with difficult trade-offs as they discuss how they are looking at the decisions their boards face.
- Trading: How do we make the current market data war winnable by refining regulations like CAT, MiFID II, PRIIPs and EMIR to assemble and label information in a coherent way?
- AML: How do registries and market participants share knowledge on bad actors to stop a meaningful percentage of them?
- Reporting: What is the target operating model for delivering market information to regulators?
- Surveillance: Is AI, ML and NLP delivering on its promise for trade, voice and electronic communication surveillance?
- Collaboration: What is the appetite for establishing trusted ground between regulator, regulated and their suppliers?
Throughout the day, we will be taking the audience’s questions and viewpoints on board as we evaluate their answers to some tough questions.
Known unknowns for 2021
Of course, even as we come to grips with the challenges we know, pollical winds continue to shape the RegTech landscape with unknowns. As I write, my inbox is cluttered with more recent issues that might not make it to this year’s debate:
- Operational Resilience. will the public’s Intolerance of failure change the operational ask for a firm?
- Future of finance. What will the future of role of a central bank be in the future financial system?
- ESG. Can the value of managing Environmental, Social, Governance risk be quantified through RegTech?
- Climate change. Can climate risk be looked at from a RegTech perspective?
- InsureTech. To what extent does current insurance regulation lend itself to automated compliance and how can RegTech solutions help?
I’m sure we will add to this list before we get to the next RegTech Council plenary on 18 June!
The industry response
One of the key issues for our industry is how to interpret the obligations in our many rulebooks. The patchwork of rule sets with which firms must comply has built up over decades, and a more technology-enabled regulatory framework will not be established overnight.
There is a large gap between the way rulebooks are written today and what the industry would require to interpret the obligations without the help of service providers. Better use of international standards and the creation of open source artefacts (e.g., tokenized interpretation, data models, code) could be encouraged by enabling the industry to create these artefacts under a governed, public/private model that allows firms to rely on them for compliance purposes.
This is why we have pushed for the RegTech Council this year. In a nutshell, the RTC argues for agreement across the industry to a framework for identifying and solving the immediate issues to create the conditions for longer term success.
However, a programme that identifies the key changes required and works with the industry to set priorities could achieve short term success that would help inform successive waves of regulatory transformation activities. The RegTech council has argued for a “safe space” where regulators, and firms and vendors (of all sizes) can freely shares experiences and ideas and decide how to collaborate to solve specific challenges.
Now, more than ever, we need technologists and regulatory specialists to come together in a governed and focused manner to tackle the regulatory priorities in a collaborative manner and make that path quicker, better, cheaper and far safer.
Who knows, with all this attention being focused on the board’s agenda, one day in the not too distant future updating your regulatory compliance systems could be as easy as updating your smart phone or lap top.
Join us if you’d like to get there.