The art of interpretation: Regtech and intrinsic complexity
In our recent thought leadership paper, Journey 2022, we discuss the questions being raised by consumers and society regarding certain technologies and how these may lead to, what we describe as, Digital Dilemmas. Let’s explore in this blog how is Regtech, a convenient shorthand for Regulatory Technology, responding, what has it delivered so far and what is the direction of travel?
The statistics are dizzying: around 170 jurisdictions, 750 regulators, millions of pages of rules and regulations, one revised every seven seconds. It is no wonder that those charged with keeping their financial institution on the regulatory rails do not always sleep easily at night.
Before addressing these questions, we should first perhaps remind ourselves how we got here in the first place. After all, modern, developed markets of every kind are regulated, particularly those which are vital to economic and societal health. What’s different about financial services?
In short, they’re complicated, carry risk and tend to the longer term. Add to this the effects of global economic integration, free flows of capital and the ingenuity of the industry to find value wherever and however it can and you have the ingredients for a set of financial instruments requiring careful monitoring and control at every level, firm, national and supra-national.
And in this complex environment, the over-riding goal does not change: to ensure the customer gets what is promised, the provider operates consistently and transparently and in line with internationally accepted principles and practice.
The financial crisis of 2007-8 and its fallout has seen far-reaching regulatory reform in every corner of the sector, not least in the regulatory frameworks and bodies themselves and, with that reform, has come a cascade of regulatory change which shows no sign of diminishing. In response, risk and compliance departments have mushroomed both with the sheer volume of reporting now demanded and the unending task of consuming, understanding and responding to new rules.
Meanwhile, regulatory fines continue to be levied at persistently high rates for misdemeanours, past and present, intentional and accidental.
All of which has catalysed forward-thinking regulators to turn to their technology markets and encourage them to help ease at least some of the pressure points. Luckily enough, this has coincided with a confluence of high performance computing with machines which ‘learn’.
The result, a set of solutions which ingest and machine-read vast quantities of regulatory data, tag, cross-reference, organise and make it available on demand to the legal, risk and compliance experts who need to consider and interpret it and following those interpretations make recommendations on what needs to be done to stay compliant in the eyes of the regulators.
These are jaw-dropping advances in a short space of time. Benefits accrue in productivity, cost and quality. Risk and compliance leaders have more time to think strategically, rather than managing corrective delivery. The firm slowly but surely can get on the front foot.
And there it seems this piece of Regtech music stops, at least today.
For the task of interpretation has not been automated and it is questionable whether in the foreseeable future it reasonably could be, given the intrinsic complexity and volume of assets, transaction types, times, places, actions and jurisdictions when mapped to the number, interdependence and constant revision to which regulation is now routinely subjected.
Equally, just as financial institutions define and manage their risk appetite dynamically, so they can and do decide dynamically how compliant they want to be, influenced by the nature of their business, its culture, the market climate and perceived sources of competitive advantage.
All this perhaps is much more than a rule set or a machine, be they never so cleverly designed, could solve for.
So Regtech has started to deliver real benefits where it best can. Breaking bulk, improving data accessibility, filtering and presenting only the relevant data. Freeing up expert, high value time to do what it should be doing and so, improving the corporate and competitive health of the firm.
And that’s something to celebrate.
Download our recently published Journey 2022 'Resolving Digital Dilemmas' Thought leadership paper.