RegTech can help but there needs to be an ‘all-encompassing package’ says CCO

RegTech can provide solutions to the financial services industry but the current market lacks an ‘all-encompassing package’ according to John Mahony, Chief Compliance Officer (CCO) at PfP Capital.

The industry is facing a host of regulations in the coming months, with MiFID II, PSD2 and GDPR all set to be implemented next year. In a rapidly changing regulatory environment the pressure on compliance officers is continuing to increase, however, RegTech solutions are promising to ease the pressure.

“RegTech and FinTech would help me do my job but it’s not just about having the systems in place. It is about accessing whether those systems are correct for a specific firm’s purposes and ensuring you are getting the right data and the appropriate information out of them. It’s not about having all the information, it’s about having the right information,” according to Mahony.

Since the global financial crisis, the spotlight has been on governance, culture and standards across the whole of the financial services industry, and particularly on banks. The Chief Compliance Officer (CCO) is primarily responsible for overseeing and managing compliance within an organisation, ensuring that the company and its employees are complying with regulatory requirements, resulting in a growing amount of personal liability.

While RegTech can provide solutions, the personal liability will always be there according to Mahony. “That liability will never be taken away by RegTech. At the same time, I do agree that a RegTech solution would be handy in assisting my role,” he added. “It will help with certain steps, but it is never going to take all of it away, it comes down to someone to ensure they are doing the right thing (having the right systems in place).”

The innovation in technology is assisting the CCO’s with regulatory reporting, risk management, identity management & control, compliance, transaction monitoring, cybersecurity, and onboarding, all resulting in increase in investment in the RegTech space.

In terms of capital invested in each RegTech subsector, three clear trends emerge. Firstly, cybersecurity and information security deals have grown rapidly from 2.7% of all investments in 2012 to 20.4% in H1 2017 according to the Global RegTech review. Secondly, compliance management deals decreased steadily as a share of the total from 38.7% to 13.5% from 2012 to H1 2017, and lastly, investments in transaction monitoring companies grew from 7.8% in 2012 to 28.1% over the same period.

“A FinTech can certainly help with the risks. From a regulatory perspective and an AIFMD perspective, the risk function is tasked with monitoring the funds and monitoring the firm and coming up with all the risks, specific to a Firm and the funds under management” according to Mahony.

“A risk alert and monitoring system would be nice, as well as having the modelling assist behind that. We are not actively looking for that as we manage that at the moment. But I think that is something the industry is looking for,” he added.

One of the biggest pieces of regulation facing the industry is the second Markets in Financial Instruments Directive (MiFID II).

As PfP Capital is a full scope UK A fund, the firm has managed to set themselves apart from the legislation as it is an asset manager primarily manages strategies outside the scope of MiFID II.

Mahony admits that the firm has had a less of stressful time trying to get to grips with MiFID II than most to get through all the reporting requirements. However, looking at the industry he sees people as ‘nearly ready but not quite there yet’, with the smaller managers closer to getting to gripes with it. “The larger managers will have a tough time. The investment banks will certainty have a tough time and I don’t think many are ready, especially in terms of unbundling and understanding the fee structures.”

PfP is not actively looking for RegTech solutions for MiFID II, but Mahony has seen a few offerings out that which are helping with data management and brokerages offering solutions which promise to break down the fees and help.

“However, I don’t think anybody can really say they have a bit of software which will make you MiFID II compliant. From what I have seen I don’t think anybody is offering the full package and will make a firm compliant,” he added.

“I have seen certain aspects of it being helped whether that’s by clearing software, or unbundling software, or making transaction reporting seamless. But I haven’t seen an all-encompassing package. It would be nice to see that. “

Instead of turning its attention to MiFID II, PfP capital has been primary focused on AIFMD and keeping an eye on the upcoming expansion of the senior managers regime (SMCR).

“We do have costs but not the costs that some will have, MiFiD II has tremendous costs associated with it. Our costs will probably increase when the senior management regime comes in as people will have to be certified and we will have to have more systems in place to monitor those people.

“We also have to have look to see what the FCA are realising in terms of permissions changing and marketing. Marketing post Brexit maybe a potential issue for us. The regulatory landscapes are always changing but we just have to control that as best we can through risk mitigation.”

Mr Mahony is also tasked with managing compliance for the wider group, including its consumer credit firm. “The FCA has taken the oversight of these firms on board and the changes there have had their obstacles, but it’s something we are dealing with well. There is also the GDPR aspect on the consumer credit side.”

Despite notable shift from competition to collaboration in the FinTech market, the services is yet to really embrace the technology. Financial services has always been very slow to move in terms of adapting to new data requirements or new technology, while FinTech has always been very fast according to Mahony.

“The problem is you are trying to piece together a very slow beast with a very fast beast but it has to come together at some point. Overtime I can see it getting better because data is becoming increasingly important going forward and the best solution for that is FinTech,” he added.

Copyright © 2017 RegTech Analyst

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