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Making regulation invisible: Using RegTech to embed rules into workflow

27 March 2017

Financial institutions are increasingly no stranger to innovative technology as a way to boost their efficiency while cutting costs. The use of RegTech (defined by the UK Chief Scientific Adviser as technology "applied to regulation and compliance to make financial regulation and reporting more transparent, efficient and effective") has similar aims to streamline related processes, human capital and cost. 

The benefits of RegTech are painfully obvious whether it is to drive down the cost of compliance, have the opportunity to use more flexible risk management systems, or to be more proactive in identifying regulatory change when it is needed.

Yet the definition of it is so wide that sometimes it is difficult to see how RegTech solutions can be successfully applied in reality. An excellent example arises in the form of RegTech which seeks to implement rules and regulations into the fundamental workflow of finance related business. In real world speak, this means embedding regulatory changes automatically into a financial institution's policy and processes.

As regulation in the UK and the EU continues to grow apace, it is understandable that financial institutions may find it difficult to keep up with the continual changes required to ensure their compliance. This compliance also comes at a significant cost – a recent report by Expand and HIS Markit estimated that preparations for MiFID II will cost the financial services industry in the region of £1.6 billion during 2017. 

But what if you could avoid the human time (and associated cost) needed to analyse and implement regulatory changes simply by employing RegTech to make them for you in your policies? What if these automated changes could be taken a step further and applied to client-facing documentation?

Let's consider a current use case for this type of RegTech. Santander has partnered with a small business loans provider called Kabbage which uses machine learning to automate credit decisions. It is not a stretch to imagine this technology taken a step further to automatically insert regulatory changes into the policies used by Santander to make those credit decisions, adding to what could become a fully automated process from application to decision to customer acceptance.

However, there is an obvious complication with this type of RegTech use. When thinking about how to implement a change in law or regulation, firms do not just insert that law or regulation verbatim into their policies. Instead they take a pragmatic view of how the change could be best applied internally, analysing what optimum implementation would look like by weighing up factors such as cost, operational constraints, the need for compliance and ease of use.

We must not forget the role played by monitoring internal culture and behaviour. Having an automatically updated policy is half the battle, but financial institutions also need to ensure that a policy operates properly in practice by checking adherence by their employees. The risk of non-compliance via human behaviour rises with the size of the institution in question.

Artificial intelligence and behavioural profiling tools are a type of RegTech which offer a solution. A good example is the market surveillance and compliance monitoring software offered by firms such as Sybenetix. This software can be used by banks and regulators alike to provide real time insight into transactions, help identify unusual trading behaviour and flag suspicious activity. Behavox are another provider which has introduced the Conduct Risk Exchange, a digital way of sharing detection algorithms between financial instructions and their regulators (effectively an early warning system). The likelihood is that RegTech in the future will be expanded to monitor other areas of financial services activity, such as first and second level oversight of conversations had relating to advice based investments.

Overall it's clear that RegTech is a technology trend in 2017 that can only continue to grow, and the need for efficient and accurate implantation of new law and regulation is only going to increase. However, relying on automated processes for compliance solutions that work within the particular culture and objectives of the business poses some challenges. 

We look forward to exploring these issues further at our round table discussion," Making Regulation Invisible - using RegTech to embed rules into workflow" at the Innovate Finance Global Summit on 11 April 2017.   

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