RegTech Set to Revolutionize Compliance and Enable New Advanced Reporting and Data Modeling Capabilities
In life, there always seems to be a battle between risk and reward. Take a chance, something great can come about versus don’t rock the boat, it can lead to trouble. Whether it’s politics (conservative vs progressive), personal life decisions (a new job versus the tried and true) or finance (cost benefit analysis), we tend to always connect increasing risk with an increase in potential reward.
For financial institutions (FI’s), many on the revenue generation side look at compliance as a hindrance, limiting their revenue potential. And, those on the compliance side, may perceive some business practices inviting undue risks, pushing the envelope of good judgement.
But what if increasing compliance can not only can decrease risk, but simultaneously, increase revenue? What magic is this, what circumvention of the natural order can possibly accomplish this?
Welcome to the new world of RegTech (regulation technology), a new buzzword that rose to popularity in recent months. RegTech promises to ease the burden of compliance, improve insight, and enable new revenue opportunities. A new report by Wolters Kluwer’s Finance, Risk & Reporting, Business Intelligence: A Tech Revolution for the Evolution in Compliance states:
“The commercial rewards, for such systems will help foster a more comprehensive, forward-looking approach to the way they manage their businesses and especially their risk: Good data leads to good decisions and good returns.”
The emergence of RegTech is attributable to the convergence of two forces; the expanding demands of financial regulators and the development of adaptable, scalable, software financial technology solutions.
Increasing Compliance Requirements
Since the economic crisis of 2008, largely blamed on risky financial transaction by numerous large players and the lack of regulatory oversight on these transactions, regulators have been busy implementing new compliance standards. The traditional “silos” of FI’s, where every segment, business line or division is separate, led to incompatible technology, processes and reporting and made oversight difficult and costly. The regulators, therefore, “have set priorities for banks to think and act more collaboratively and prospectively and to employ systems that allow them to manage data, especially related to risk, in ways that are consistent with those goals.”
More importantly, it’s not about collecting data, rather it’s about understanding data; “A key goal is to ensure that institutions have the right tools to give them an awareness and understanding of all the risks, simple and complex, that they are taking.” Someone has a personal responsibility — board member, senior executive or compliance officer — to sign off on compliance, therefore they need to understand what is really happening. This not only goes for accountability issues, it’s an operational issue, where all main players should actually know what the business is doing.
While the theory is fine, it’s a huge task, “compiling and interpreting data to producing risk analyses and forecasts to interfacing with the relevant agencies to file regular and ad hoc reports and then adjusting parameters and procedures seamlessly when new requirements are imposed.”
That’s where the technology component comes into play. Technology has always been prevalent in FIs, but the tech used was generally to support completing specific tasks for specific business departments. There was no cross-platform integration, just as there wasn’t much cross-department communication.
New Technology Paradigm
The mindset of web 2.0, with an emphasis on open source, adaptable software and flexible cloud-based computing is exactly what compliance now requires. Legacy systems don’t need to be taken out to the woodshed and put out of their misery, rather they can continue to perform their role and a data channel open to a flexible, integration platform; “That gives systems greater agility and flexibility, with less need for human minders to twist the knobs, and permits data to be analyzed and reports prepared more quickly for supervisory bodies imposing requirements under many sets of rules and standards.”
RegTech is not just about making compliance easier. It’s about the agility and flexibility to analyze data on a scale impossible before. What if interest rates suddenly spike? Or, if the Euro takes a dive? Questions about the overall risk profile are a natural for regulators and compliance.
Modeling the Future
But, these financial scenarios are also huge opportunities. Having the data in place and knowing beforehand how it will impact your FI, can help reposition your allocations to maximize advantages. The right technology can help you be forward-thinking, not only analyzing historical data, but anticipating numerous scenarios to profit in all types of environments.
RegTech is not just about compliance, but rather, is an enabler to quickly open new doors to new markets while maintaining oversight, protection and security.