Financial firms in Europe have spent billions on regulatory compliance, and they still face more new rules that will require more spending, according to JWG, a London think tank focused on regulation.
“Why, after eight years of regulatory reform, is the industry still struggling to fund companies that can revolutionize the way we establish policies and ensure compliance?” asked CEO PJ Di Giammarino. Its JWG Regtech Capital Markets conference in London on March 7 will bring together financial firms, regulators, technology companies and consultants to discuss existing and pending regulation.
MiFID II took effect in January but beyond that are Europe’s GDPR, BCBS 239, Recovery and Resolution planning and other horizontal regulations that impose named accountability for senior managers, Di Giammarino said.
The good news is that regulators across countries seem to be collaborating, wrote Tom Bicknell, research analyst at JWG Group
“2017 saw significant developments in financial and regulatory technological innovation – and many regulators have been moving in parallel…the global collaborative fabric is coming together” to protect the system and consumer while, at the same time, promoting growth and innovation.
JWG’s research has found regulators collaborating on modernizing rulebooks, digitally filtering and routing regulations, providing advice on regulatory obligations, undertaking regulatory reporting and domain modeling, conferring on KYC and on algorithmic trading.
UK's FCA actively works with fintech and financial firms
Leading the way has been the UK’s Financial Conduct Authority (FCA) which sponsored a Techsprint in November “to use RegTech to prove the regulatory reporting burden for firms could be reduced by automating the interpretation process.” The FCA has also developed a sandbox to let financial and fintech firms “test theories and concepts within a safe space before they fully enter the financial services market.”
JWG notes that Singapore and Australia have also developed frameworks for collaborating in RegTech. The U.S. lags in collaborating, Bicknell wrote, partly because it has five federal agencies and numerous state bodies governing financial services firms, and it has such a history of litigation.
Canada’s national government has adopted RegTech as one of its priorities and launched a sandbox of its own. It will focus on existing strengths in artificial intelligence, big data and cybersecurity, according to Bicknell.
“In the Middle East, Abu Dhabi Global Market (ADGM), the international financial centre in the UAE, announced in October 2017 the launch of its FinTech Innovation Centre. The aim of this initiative is to support financial innovation, cultivate developments in the RegTech and FinTech spaces, and foster closer industry collaboration.”
JWG calls for a globally coordinated approach to a the challenges of a global financial services marketplace.
“The ultimate aim for regulators should be to facilitate collaboration between the public and private sectors,” said Bicknell’s report.
“An example of one such collective is the RegTech Council (RTC). Launched in the UK in February 2017, the RTC consists of over 170 individuals from 90 institutions, with equal participation from financial institutions, technology companies and regulators. Currently, there is no ‘safe place’ where regulators, financial firms and tech firms can collaborate to develop solutions to the challenges being faced by the industry. The RTC creates a platform that bridges the gap between regulators, firms, academia and the wider financial and technology markets, thereby facilitating collaboration with the ultimate aim of adopting one, single, comprehensive regulatory model.”
In Europe, the European Securities and Markets Authority (ESMA) has adopted a more limited approach to collaboration, according to Bicknell.
“Where ESMA has acted as a facilitator, albeit in a limited capacity, is its effort to encourage firms to digitalize their data systems to ensure that the data is transmitted in a digital format that can be easily processed and analyzed.”
In China collaboration is mainly between FinTech and RegTech firms.
“Currently, however, Chinese regulators are lacking the political will to embrace the new Regulatory technologies that are being developed.”
Pendo Systems, with headquarters in Montclair, NJ and an office in Charlotte, NC, will participate in the JWG RegTech Capital Markets conference. The company has recently released V4 of its Pendo Machine Learning Platform (PMLP), a data management platform that works across unstructured data.
Ruth Wandhöfer, managing director / global head of regulatory & market strategy at Citi and a Pendo board member, will be a keynote speaker at the conference. Pendo is an example of how the latest technologies, in its case the ability to work with unstructured data, can streamline compliance.
Working with a major money center bank in the U.S., Pendo was able to complete a loan lineage project involving 48 million documents in just eight weeks, said its CEO Pamela Cytron. With that project alone they saved their customer almost four years in time, and more than $3.5m in cost, she added.
The ability to work with unstructured data will be key to RegTech, said JWG Group’s Bicknell.
“The archaic business structures of many investment firms means that various data sources, such as voice, video, or trading data, are often isolated from each other and unstructured in format. This creates significant challenges in complying with new regulations in areas such as reporting, record keeping and trade surveillance, particularly as regulators are beginning to focus on firms having the capability to demonstrate compliance on request on an ad hoc basis under new regimes such as MiFID II.”
“The whole industry is under huge pressure to manage their data more efficiently,” said Cytron. “Regulation is by far the biggest driver, but now it is essential that all financial firms look beyond just satisfying the demands of the regulators and consider other ways in which they can actually use these stringent directives to drive better services and in turn increase revenues.”
Bicknell said firms are increasingly looking to technology.
“RegTech solutions that utilize Artificial Intelligence are able to sift through huge quantities of data in a matter of seconds and can establish connections between completely unrelated sets of data, saving firms hours of manual intervention. These RegTech solutions can break down the barriers between the various unstructured data silos, helping firms to meet the holistic requirements of major pieces of regulation such as MAR and MiFID II.”
