According to the experts, soon 300,000 euros worth of software will be able to do the same amount of work as would currently take a large bank 100 FTEs and 100 million euros. And it’ll do the job better. This is the promise made by regtech, fintech’s younger sibling. Regtech will mean we’ll no longer have to try our hardest to comply with regulations, we’ll be able to achieve real-time compliance using algorithms.
In the last ten years, the financial sector has been buried in regulations. The costs keep growing, while its complexity is starting to outpace human understanding. Is regtech capable of absorbing the next wave? Or are we just hoping for the impossible?
To answer that question: yes, regtech has the potential to absorb the next wave. And, in fact, it’s really the only viable card the sector can play. According to who? Well, to Rens Rozekrans and AnneMarie Smit. Rens is one of KPMG’s leading forensic specialists and for the past year has been responsible for KPMG’s regulatory advisory services. AnneMarie leads KPMG’s governance practice and until recently was head of the Assessment Expertise Centre of the Dutch Central Bank. Both know the expanding regulatory universe intimately. And they’re taking a huge interest in the role of technology in compliance.
IFRS 9, BASEL 4, MIFID 2, MAD 2. A lot of regulatory packages are scheduled. When will things start to quiet down?
Smit: “Regulations are growing exponentially, I can see that just from my inbox. I get a feed with updates almost every day. After Basel 3 we heard: there won’t be a Basel 4. But every new regulatory package increases the complexity and also the need for clarity. And there will be more rules to explain the existing rules. Since MiFID 1, more than 10,000 pages of regulations have been published for MiFID 2. And I feel that the end is far from in sight.”
When will organisations reach the point that they can no longer cope?
Rozekrans: “Basically we’re getting close. There’s no financial institution in the world which is fully compliant. Because too much is happening. And looking at the costs we can see the toll this is taking.”
There are hardly any regtech early adopters. What do you expect from a technology that has not yet proven itself?
Rozekrans: “Regtech is already being used: track & tracing suspicious transactions; in know-your-customer processes. We started with the easy stuff and are now getting to the difficult things: cognitive systems that not only detect errors but provide true insight.”
Smit: “What do all the regulations say, what do I have to comply with and how do all these various rules inter-relate? Nowadays, staff are manually comparing thousands of pages of regulations. No one’s really arguing against the fact that technology can do a better job.”
Rozekrans: “We’re in the process of proving it ourselves. Currently we’re working on a service for customers which will connect KPMG’s expertise with that of IBM Watson. Our ambition is to market a cognitive system, within a year, that will map various legislation in detail for organisations. It’s a complex system that requires significant investment, but we can keep the costs down because basically we’ll be able to offer it to any organisation.”
Can we expect regtech to reduce compliance costs within a few years?
Rozekrans: “No, I can only see that happening in the long term. Initially an investment will have to be made to learn how to use the technology. You can see that this is the crux of the matter for many organisations: they have to move through the cost barrier. Do I opt for certainty right now with approximately 100 FTEs or do I take a chance on the new working method at the same cost? Uncertainty without a direct cost advantage is generally not the option companies prefer.”
What should your motivation be?
Smit: “I believe that, at the moment, ‘control’ is a better motivation than ‘costs’. Right now many organisations are reactive: they wait for the new rules and comply with them subsequently. Regtech can free up cognitive capacity which can be used for forward-thinking. Enabling organisations to make comparisons and to reflect on scenarios at an early stage. This will make it easier to market new products which will provide a competitive advantage.” Rozekrans: “At that crossroads of knowledge and technology, we at KPMG have developed a relatively simple tool to help banks identify trends from their quarterly reports. Those enormous reports seem to be mainly developed for one-way traffic to the supervisor, but smart systems can obtain a strategic advantage from them.”
What the key players say:
“Banks have to automate compliance because they are running out of people who can do it”
PJ DI GIAMMARINO
"Banks are switching to be really data-driven companies — that will be one of the biggest drivers for the industry in the next few years and regtech will be part of that,”
“Technology [in compliance and risk] is not only superior in a number of factors, it’s probably a lot cheaper and it’s certainly a lot faster than bank’s back offices”
|Regtech in brief
Regtech is the marriage of regulations and technology. Its main objective is to organise large flows of data and to explain them. This will make regulatory compliance more cost-effective and improve its quality. The term regtech has only been around for a couple of years; although prior to this technology was already being used in compliance of course, just not at the same scale and potency as the current tools. And not with the same urgency: in order to keep up with agile competitors in fintech, traditional players in the financial sector will have to reduce their heavy compliance burden. The applications the sector is really looking forward to are mature gap analysis tools enabling organisations to see quickly whether their business units are compliant or not, and related applications such as regulatory reporting tools. These tools are expected to drastically reduce the number of FTEs required by financial institutions (and therefore the related costs). Moreover, it’s a two-way street: supervisors will also use regtech to make processes easier to use. The British Financial Conduct Authority is a frontrunner in this respect i.e. by organising ‘techsprints’ to resolve a number of issues.
Problems that regtech needs to resolve
1. Collecting and bundling large amounts of data
2. Scenario analysis and forecasting
3. Monitoring real-time transactions
4. Identification of customers and legal bodies
5. Monitoring internal culture and conduct
6. Trading on financial markets
7. Recognising and interpreting new regulations
2.2 billion dollars
43,000 compliance employees
118.7 billion dollars
1 day a week
From 50 to 200