Over the past ten years, banks have faced significantly more regulatory and compliance responsibilities.
Prior to the Global Financial Crisis (GFC), banks could get away with a compliance and risk management strategy that was relatively lax. Although compliance regulations were probably in existence, a bank’s profits were typically given more attention.
The emphasis on the risk side of the risk/reward equation has, however, been significantly increased since the GFC. Naturally, profits are crucial, but because of severe regulatory requirements, banks can no longer afford to disregard compliance and risk management.
RegTech describes technological advancements that simplify and enhance regulatory procedures. RegTech has developed in three stages, similar to FinTech. The Basel II Capital Accord served as an example of how large financial institutions used technology to integrate technology into their internal processes to battle rising compliance costs and complexity during the first stage of RegTech.
New post-GFC regulatory requirements and the expenses associated with implementing them for the financial industry have motivated the second stage, known as RegTech 2.0. Regulators are simultaneously working to improve their capacity to assess the growing volumes of data produced by post-GFC reporting obligations and to reflect the increasingly digital nature of the markets they regulate.
In the third stage of its growth, known as RegTech 3.0, where technology will help us rethink finance and its regulation in order to create a better financial system, RegTech will show its greatest potential. Finally, we contend that a transition from a KYC paradigm to a KYD mindset may be prompted by the increasingly data-centric nature of both FinTech and RegTech.
The Evolution of RegTech
Regulatory restrictions currently facing banks are constantly changing. Regulations are becoming more prevalent every year. Since the GFC, the rate of regulatory change has been rising and shows no indications of decreasing.
It has become extremely difficult to manage the new wave of regulations, such PSD2 or GDPR, while also taking third-party risk management standards and data protection frameworks into consideration. The process of staying current with regulations and swiftly putting new rules into place has become much more difficult and stressful in recent years.
If you don’t comply, the penalty could bankrupt you. Furthermore, breaking the law carries a serious cost to one’s reputation. This could have an effect on a bank’s bottom line and client relationships.
As a result, it is clear that compliance personnel are under pressure today. It is not simple to accurately handle the quickly expanding data requirements, keep a strong document management system, and adopt new policies. There is frequently some conflict between the compliance department and other divisions inside the bank. This is because increased regulatory requirements are using up more and more of a bank’s internal resources, which leaves fewer resources available for revenue-generating activities.
What then is the answer? How can banks streamline the compliance process for compliance experts and cut down on the time and resources needed to comply with the most recent regulations?
RegTech has advantages for both business and regulators. For the business community, it can enable financial institutions to better manage costs and risks, free up extra regulatory capital, and open up new opportunities for FinTech startups, consultancy firms, and software companies.
It promotes the development of simulation systems and sandboxes, which can determine the likely effects of suggested reforms and new approaches. For regulators, this enables the development of continuous-monitoring tools to identify issues as they arise and shorten the time it takes to investigate compliance violations.
RegTech can make the compliance process more efficient:
Since the GFC, there has been a rise in the demands placed on compliance specialists, necessitating the development of a brand-new industry known as “RegTech.” New rules necessitate the use of new technology. It’s the obvious course of action when it comes to developing a more affordable, automated regulatory compliance solution.
RegTech, as the name suggests, employs technology to lessen the regulatory burden on businesses that provide financial services. In essence, it makes it easier for compliance teams to apply new requirements. As a result, it can not only greatly simplify the lives of compliance specialists but also increase a bank’s profitability.
Compliance specialists can help a bank avoid unintentional compliance failure by embracing RegTech and ensuring that it will be able to meet its regulatory standards in the future. It will be increasingly important for banks to use RegTech to streamline the compliance process as regulatory regulations and data and reporting needs rise. Let’s thus analyze the advantages RegTech can offer and how it can help compliance professionals today.
Document management and cooperation:
Today’s management of regulatory change requires a higher level of cooperation from numerous stakeholders inside an organization.
Regulators today demand workers at different levels across multiple divisions of the organization to be active in the compliance process, whereas in the past, regulatory compliance was exclusively the responsibility of the compliance department. For instance, the risk management, IT, legal, finance, operations, and human resources departments should all contribute to the implementation of compliance in addition to top management. Therefore, overcoming the compliance difficulties of today calls for extensive stakeholder cooperation.
Document management is a significant issue that compliance employees must deal with in this regard. The process of revising policies and communication tools across numerous departments and organizational levels is not simple. Banks have often used normal Word or Excel files as compliance documentation up to this point. Numerous people have frequently modified, shared, and changed these. Additionally, every important conversation and decision pertaining to the editing of these documents has been communicated via email, making it incredibly difficult to keep track of all of this correspondence. The lack of transparency with regard to such documents results from this. Can compliance personnel guarantee the accuracy of all documents?
Here, two general solutions are required. In order to track the review process step-by-step and determine who changed which documents and when, compliance employees first require a system. Second, a centralized repository for policies, papers, communications, and emails is essential. Innovation in the RegTech space can help here. Modern RegTech platforms can also offer a centralised document storage location, streamlining the process of enabling regulatory change. They do this by providing a clear audit trail so that the compliance professional can be sure that reports are accurate and the bank is up to date with all the latest policy changes.
Use of data:
RegTech can be extremely useful for controlling data, as well.
Today’s compliance professionals face a number of challenges, including data aggregation as they work to meet stringent reporting deadlines and continually expanding data requirements. A recent explosion in the amount of data that needs to be managed for compliance reasons is a result of rising regulatory obligations.
While expanding a bank’s IT infrastructure and implementing new systems to keep track of compliance data may provide a short-term solution, in the long run, doing so will only result in higher costs and a situation where different data sets are dispersed across various systems, making it more difficult for compliance personnel to collect data. Banks require access to a high-end, low-cost platform that can centralize all compliance data and present a complete, transparent, and accurate firm-wide view of the company’s compliance program.
This is made possible by RegTech, which enables banks to digitize their compliance initiatives. This can make it simple and quick for compliance specialists to access aggregated data at the corporate level.
Savings in time:
The amount of time lost responding to regulatory and internal audit requests is a major source of annoyance for compliance professionals.
Without RegTech, a significant amount of time could be lost integrating documents and data from many parties. It takes time to obtain information from various stakeholders and then follow up with each participant to get the necessary feedback. Tight regulatory deadlines make this process much more challenging.
Compliance personnel want a centralized system that transparently unifies the whole compliance operation, emphasizes important deadlines, and keeps everyone on task. RegTech allows for this. Policies, data, communications, and other items can all be conveniently accessed with the use of RegTech innovation, saving a significant amount of time while preparing for the regulators. Reduced costs as a result of time savings affect the bottom line.
RegTech is a beneficial strategy. It not only lessens the workload for compliance specialists, but it can also dramatically reduce compliance costs, increasing a bank’s profits in the process. It will eventually allow for the automation of regulatory compliance.
What future for RegTech?
A KPMG analysis projects that by 2022, corporate spending in the RegTech sector would amount $76 billion, which is a seven-fold increase over investments in 2017.
This indicates that by 2022, 34% of all business regulatory spending will be spent on RegTech solutions. The RegTech business will undergo significant transformation as a result of these increasing expenditures, and the financial companies engaged will also need to adjust how they approach this market.
Companies will transition from a more “functional” usage of RegTech solutions, which are made to assure compliance and enhance oversight of employee duties, to a sort of RegTech 3.0, where these technologies will be utilized to assist businesses better manage and use their data. A better overall view will ideally assist businesses in avoiding risks and anticipating issues that might be brought on by technological advancements as a result of digital transformation, but also how they might be resolved.
It is obvious that there is still a long distance to go and that the path has just started. RegTech has many advantages, but one thing is certain: as always, the businesses that adapt to new technologies the best and who are able to catch these changes before the competition will be able to drastically change their compliance, turning it into an opportunity for the business and a lever for staying competitive.
The strategy that RegTech offers for managing compliance and controlling the suitability of processes and operational risks is the only one left, and every organization must realize this. RegTech is no longer a question of “if,” but rather of “what.”
At most, you will be able to decide which solution to embrace first or preferentially, knowing that whichever decision you make, it will only be the start of an unavoidable transition that will permanently alter how your organization operates.
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