What is it? Why does it exist? What is its future?
For the latest in our Capco Institute video series , we asked a distinguished panel of senior banking, technology and legal practitioners to discuss what RegTech is, what some of its “hot areas” are, what kind of role the regulator will play in its development and what anyone developing viable RegTech solutions should keep front of mind.
In the second and final part of this blog, we reflect on those last two issues. Click here to read Part One.
The regulator’s role is the most sophisticated it has ever been.
The increasing and unrelenting amount of new and expanded regulation and its impact on the financial industry has been discussed repeatedly. The pressure from regulation today is about more than volume alone, as significant as this volume is.
Regulators in finance are more than standard setters or enforcers. Their remit extends to active encouragement of greater competition, along with reductions in risk faced by consumers. Regulators are shaping the market and its values, as well as pressing for compliance to rules. What does this proactive and pivotal role of the regulator imply for RegTech?
To talk to the regulator, technologists no longer have to go through the banks.
The good news, certainly for technology solutions developers, is that the regulators are more accessible and more receptive to new thinking than before. In practical terms, this manifests through initiatives such as sandboxes, where regulators can share their specific expectations with RegTech innovators. What are regulators likely to say?
First, regulators want to do their job more easily. While the regulatory tsunami narrative is usually told from the banks’ perspective, with banks encumbered with a new heavy regulatory burden, but this coin has two sides. On the reverse, regulatory bodies are equally inundated by the return flow of compliance-related data that they must make sense of with limited resources. Regulators will respond with enthusiasm to technologies that optimize those resources by replacing complexity with visibility.
In practice, this means a solutions development environment whose goal is increased clarity, accuracy and speed, premium outcomes from the regulators’ perspective. For example, regulators will welcome solutions that enable the re-creation of a trade in seconds instead of days. Assured accuracy and timely availability of data will support supervisory functions more than almost any other factor. And clarity of understanding from the beginning – of regulatory frameworks, standards and intent – will lead to technology-driven solutions that don’t have to be expensively reworked as soon as regulators implement them.
RegTech development should enable regulators to clearly show their intentions – and also listen.
Improved access to, and closer collaboration with, regulators is also a two-sided coin. In addition to the regulators laying down the law, access and collaboration also offers technologists valuable opportunities to press for sensible accommodations and improvements. For example, these could include making the case for harmonization of data standards, especially in multijurisdiction contexts.
Given these challenging yet exciting dynamics, what do RegTech solutions developers need to focus on to succeed? As in any other business, developers need to understand the market and the needs of its players. For RegTech, developers must understand and accommodate financial institutions and the regulator.
Creating successful applications demands real application to the complex needs of a dynamic market.
Solutions sell only when they effectively solve clear and present problems. Given that regulatory impetus will always stem from the regulator, understanding current and likely future regulatory demands is crucial. But in this context, navigating shifting, apparently contradictory and multijurisdictional rules poses a challenge in itself.
The successful RegTech solutions developers will thoroughly understand the context before they write any code. By doing so, they will have the confidence that comes from credibility, when they talk to financial institution clients. However, understanding the regulator is only one part of the challenge. The next hurdle is acquiring a detailed knowledge of how established financial institutions work and think.
Operationally, the typical institution uses fragmented legacy technologies and equally fragmented data sources. So, any solution predicated on “ideal world” practices will likely fail. Culturally, institutions are sensitive to potential risk in a space where defective operations are not an option. Commercially, they often present a steeplechase of procurement procedures. These cause many contenders to fall at the first hurdle, startups in particular.
The bottom line is that financial institutions will demand their RegTech solution providers do it all. Credibility comes from broad and deep understanding of the regulatory environment: rules and intent, the explicit and the nuanced. It comes from the competence to handle and safeguard sensitive data. It comes from a technical aptitude that can integrate the most fragmented data environments. And it comes from the agility to transform multijurisdictional inputs into dual-purpose outputs. These outputs will provide predictably robust compliance. They will also yield productive business insights, from analysis of the same data.
Far from going away any time soon, RegTech will remain with us as long as there is regulation, and RegTech solution providers have an immensely valuable role. Potentially, they can provide an interface between operational reality for institutions and the compliance expectations of the regulators. If they get it right, their future is assured.
Jack Beldon is a managing principal at Capco London specializing in capital markets regulations. He has more than 15 years of experience delivering world-class operating models for leading investment banks.
The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.