How regtech can help banks conquer compliance mountain
The years since the financial crisis have seen a massive expansion in regulation and a corresponding boom in the number of compliance officers. Could technology cut costs and lower the error count?
As anyone who has seen the spectacular view from the Eiffel Tower will know, you can either climb 704 steps to the second tier or get an elevator right to the top.
Well, according to JWG, in the years between the financial crisis and 2020, regulators in G20 countries will have produced a document pile the height of three Eiffel Towers. That is one hell of an ascent for compliance officers. Historically, they have had to take the metaphorical staircase, but the burgeoning regtech revolution could save their stress (and sweat) by providing a fast track to the summit.
The rise of regtech is significant for wealth management. While in recent years the net global headcount of private bankers among the largest banks has remained static, compliance headcounts have almost doubled.
This talent does not come cheap. In fact the demand for high-quality compliance staff is translating into larger gains in salaries year-on-year relative to other support functions.
Regtech has been born out of the need to make the process of managing regulations more efficient from both a cost and implementation perspective. Rather than relying on humans to decipher the extensive and ever-evolving swathe of regulatory content, these solutions harness artificial intelligence to streamline the process, cut costs and minimise errors.
New solutions
Just how far can they go? The most sensible review of functionality we have found is from Planet Compliance, which groups regtech into seven areas: reporting, monitoring, training, legal and regulatory analysis, client and counterparty identification, data warehousing and compliance general (see table).
Perhaps the best-known individual solution is IBM’s Watson, which falls under monitoring and regulatory analysis. It can analyse changing trading patterns and employee communications to determine potentially illicit activity. The Watson team are also developing a methodology to categorise rules and regulations and align them with appropriate enforcement mechanisms.
While Watson is a ‘big name’, one of the most exciting things about this digital revolution is innovation is driven by regulators themselves. Last year, the UK’s Financial Conduct Authority launched its regulatory sandbox to provide a ‘safe space’ in which firms could test innovative products and services.
Similarly, Ong Chong Tee of the Monetary Authority of Singapore announced that they wanted to ‘co-create’ regulatory technologies for the purpose of validating customer information and ensuring standards on KYC [Know Your Customer].
Importantly, this regulatory focus is one which really matters to high net worth clients. In research Scorpio conducted with FactSet last year, ensuring firms have secure technologies to keep money safe should be the top area of attention for regulators, according to high value customers.
The impact of regtech in wealth remains to be seen but we will be keeping our eyes and ears open for evidence of successful digital initiatives which aim to tackle regulation in the sector. In theory, regtech has the potential to drastically reduce costs, create efficiencies, satisfy the regulator and delight clients.
Now, is that view not looking delightful?
Ruohan Wang is an analyst at wealth management think-tank Scorpio Partnership
