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Embracing RegTech – how financial institutions can and should embrace RegTech

With more regulation and limited resources comes the requirement for faster and easier ways to comply with regulations. This requirement has been filled by the proliferation of RegTech companies, who offer services as varied as interpreting new regulations, fraud prevention, and risk management, to name a few.

But why should financial institutions use RegTech? According to some estimates, compliance costs firms roughly $1 billion per year, on average. This number is unlikely to decline anytime soon as regulations continue and become more complex, requiring more time and people to be compliant. RegTech helps banks comply with regulations in a more agile and efficient manner through technology and automation. For example, KYC and AML applications offer significant gains as it’s time-consuming for humans to do, but not for RegTech, which can automate it.

Whilst RegTech offers these services and benefits, bringing RegTech in-house, into large and complex financial institutions remains the challenge for both financial institutions and RegTechs.

Whether it is the long and complex procurement process or the challenges of embedding new products into and/or onto legacy systems, all too familiar obstacles abound. True, none of these obstacles are insurmountable, but they do result in time slippage for product implementation and frustrations for everyone.

Over and above these operational challenges, I wonder if there is also a cultural resistance to RegTechs?

The primary fear with RegTech is: will they cannibalise compliance jobs? Whether they will or not, and I do not think they will, I do think they are here to stay and should be embraced.

Despite the obstacles and concerns, companies are trying to capture the benefits. For example, in 2015 Goldman Sachs, JPMorgan Chase and Morgan Stanley joined with a RegTech firm, SmartStream, to create the Reference Data Utility (RDU). It provides accurate reference data for use in regulatory reporting, trade processing and risk management functions. RDU has simplified and reduced unnecessary costs because it sources, validates and cross-references data using best practices so that the banks don’t have to duplicate this work. The banks simply receive data that is fit-for-purpose based on their compliance frameworks.

What will help enable RegTech adoption is that are all parties are business ready, which entails:

  •  Clearly defined requirements;
  •  Expert project management with clear communication strategies;
  •  Effective change management processes; and
  •  The readiness of application landscapes (especially data structures)

All of the above will definitely help, but fostering and nurturing the right culture can make everything much easier. A couple of suggestions:

Hire staff from RegTechs. These individuals really do know the potential of RegTech products and truly understand what they can do. They can champion them from the inside.

Hire compliance staff that are not only experts in their field(s) but are also tech-savvy. This two-pronged background will mean that when new products are suggested/introduced into financial institutions, compliance staff will not immediately recoil.

For in-house compliance staff that are not tech-savvy; invest in training them. I know from my own experience, a couple of technology-focused courses, including an introduction to coding, have helped me to understand these new products and how they operate.

Embrace the differences: One of the attractions of RegTech is not only their products but also that they are innovative and agile. However, they are subsumed into behemoth financial institutions, where change is very slow.

By embedding RegTech into financial institutions, the expectation shouldn’t be that they are turned into a mirror image of the financial institution, which draws out the vitality and innovation from them, rather they should be embraced as to what they can bring to the table with both parties learning from each other!

Get in touch for an initial discussion.