May you live in interesting times. Sounds nice, but it's actually a Chinese curse; interesting implies eventful and eventful is not always good. Considering how eventful 2016 was, we’re in store for a turbulent, dramatic year with a whole lot of changes. While no one has a crystal ball, we can make some predictions for RegTech based on market trends, consumer behavior, insight from industry thought leaders and foreseeable events.
One major factor to watch is the changing outlook of the new US Administration. President Trump has promised many changes to decrease regulatory oversight, including the dismantling of Dodd-Frank. In response, banking stocks have enjoyed substantial gains, with the sector gaining over 24% over the course of the year. However, as most politicians already know, it’s one thing to say something in election season and quite another to actually implement those promises.
Dodd-Frank is a wide-ranging Act, with over 1600 sections and 800 pages. Originally put in as a response to the economic crisis of 2008, there are many sections that still have wide appeal and will be hard to simply remove. While Trump does have Republican control in both the House and the Senate, there doesn’t seem like there is a huge demand to make dramatic changes and the Trump team is “tempering his promise in favor of rescinding or scaling back the individual provisions Republicans find most objectionable.” The market is doing fine, the banks have already incorporated many of the changes and uncertainty is never good for the market.
Anti-Money Laundering Legislation
As for changes in AML (anti-money laundering) or KYC (know your customer) legislation, Trump will be constrained by promises for a tough anti-terrorist agenda. One of the most effective ways to limit terrorist activity is by limiting their access to money, and according to Jonathan Lopez, previously the inaugural deputy chief of the U.S. Justice Department’s Money Laundering & Bank Integrity Unit; “Contrary to his general anti-regulatory stance, I would expect he would continue down that path to ensure our institutions aren’t being used for terrorism finance.”
There are, however, many regulatory issues that Trump will have a big hand in determining; OCC National Charter for new fintechs, policies for a regulatory sandbox, SEC crowdfunding rules, Consumer Financial Protection Bureau product and compliance reviews. Each fintech or regtech innovation will eventually need some rule or guidance from a governing body, so the year should see many of these be debated and perhaps enacted.
Another policy touted by Trump that can affect the technology side of things is his stance on immigration. With the dearth of talent that the tech industry is experiencing, any limitation on the uptake of new talent is problematic. Recent meetings between tech heavyweights and the incoming President point to his understanding of the issue and any immigration reform is likely to include exceptions for the industry.
On the other side of the pond, terms for Brexit will be in deep negotiation during 2017. UK Prime Minister May has promised to trigger Article 50 in March 2017, which then starts the two-year process of Britain exiting the EU. With London being the number one financial city on the planet, there’ll be a lot of financial lobbying on behalf of the City to keep its prime position. That might not matter, as the major members of the EU will want to force a hard deal on the UK, to discourage other countries from leaving as well. This lack of certainty will overhang the UK financial industry and firms will start moving London operations elsewhere.
Besides Brexit, Europe will have upcoming regulation implementation dates to deal with. MiFID II, IFRS 9 and PSD2 all come into effect in early 2018, so financial institutions will be hard pressed just to meet the new compliance standards. Even at this late date, there are questions, so the roll-out won’t go smooth and there will be push back by compliance officers. An extension of some of the requirements is possible, especially if regulators can’t clarify specific requirements (we’re looking at you IFRS 9).
Even sooner than that, the 4th AMLD will come into effect in 2017, with member state implementation due by June 26. Tightening rules for KYC compliance and due diligence are therefore necessary, as well as “notified electronic identification schemes and means that offer high-level secure tools and provide a benchmark against which assessing the identification methods set up at the national level may be checked.”
No matter what happens in Washington, London and other capitals, tech will continue to innovate. One area that is rapidly evolving and could fundamentally alter the nature of RegTech is AI. Recently, IBM announced that it is actively ‘coaching’ Watson to crunch complex legislation and compliance materials. No doubt, it’s needed as there are estimates that over 300 million pages of regulatory documents will be published by 2020.
Disregarding the recent rise in the price of Bitcoin, blockchain technology will increasingly be put in place in real-world business applications. In 2017, Visa will be piloting its Visa B2B Connect, a near real-time settlement platform.
According to Peter Loop, associate vice president and principal technology architect at Infosys: “Despite misconceptions that blockchain is years away, we’ll see full deployments in financial services, insurance, and healthcare industries next year. This will completely disrupt our payment systems on an international scale — revenue models and other processes will become obsolete, and payment methods will become faster, cheaper and safer.”
Digital payments will continue to evolve and expand. The biggest digital money experiment on the planet is India’s recent launch of the Aadhaar payment app and while there have been problems, the scope of turning over a billion people into a cashless society is breathtaking. 2017 will be the year it shakes out; anyone interested in new payment models will closely follow what happens there as that can be a precursor to similar models around the world.
That is a good note to leave this forecast on; the promise of greater financial inclusion for the underserved groups. One of the driving factors behind the sudden adoption of the Aadhaar app is to make it easier for the poor to receive money and make payments, as well as limit corruption.
A world with less corruption and less poverty is an amazing prospect. As Stephen Ufford, Trulioo’s CEO and Founder says: “RegTech has real impact, enabling people to live better lives and helping put a lid on corruption.” We hope in 2017 you live a better life and wish you peace and prosperity through the New Year!