As regulatory compliance demands increase, financial institutions continue to face an uphill battle to combat financial crime and often face millions in fine and damages. However, they can mitigate these risks by embracing RegTech solutions.
In an All Women RegTech Panel called ‘RegTech: compliance and supervision re-imagined’ within the 1st RegTech Conference organised by Boussias, Clausematch head of product Anastasia Dokuchaeva alongside European Banking Authority senior policy expert Nicola Yiannoulis, Gauss Ventures partner Dr Ruth Wandhöfer and Allen & Overy head of fuse Shruti Ajitsaria delved deeper into the challenges facing companies with respect to regulatory compliance.
The panel was moderated by Citi Innovation Labs head of strategy Sophia Bantanidis who said that after more than a decade of global regulatory reforms defined by the 2008 financial crisis, deep-cutting changes have reshaped the regulatory environment for financial institutions. Admittedly, companies have seen a flood of new laws and regulations come pouring in which created reams of red tape to cut through – making the work of risk and compliance functions more complex and time-consuming.
Furthermore, and the gradient has increased in the wake of the ongoing Covid-19 pandemic. Bantanidis said, “The recent events over the last year with the Covid-19 health crisis has brought RegTech to centre stage.” She added that the key reason for that was because the pandemic led to a significant increase in fraud, money laundering and terrorist financing as cybercriminals seek to exploit heightened security risks. This added to the challenges facing financial institutions which were also dealing with social distancing measures, limited services, staff shortages and suspension of conventional servicing channels such as branches.
This led to banks – that used to be traditionally hesitant – increasingly adopt RegTech solutions in areas with too much manual intervention such as know your customer (KYC) and anti-money laundering (AML) strategies. Tellingly, demand for digital compliance RegTech solutions has skyrocketed in recent years. The global RegTech market is expected to grow from $6.3bn in 2020 to $22.2bn by 2027, according to a recent analysis from Research and Markets.
According to Wandhöfer as regulation continues to evolve – from balance sheet management and capital liquidity risk including operational risk to AML and KYC – so should companies’ reliance on RegTech. She added that compliance processes, AML and KYC tended to be huge heaps of paper that were reviewed once a year. However, the way forward is to automate the process to minimise manual intervention. She continued that, “Fraud is a key area that continues to be a big focus and this is also spilling over into the emerging and continuously growing cryptocurrencies-based digital asset space.”
In fact, Wandhöfer said, “One area where the industry has been a little bit lagging behind, is the broader AI view around risk management and risk analytics risk modelling using synthetic data sets with agent-based risk modelling which can give you a real interesting insight on fraud trends [and] insights on how you model the risks from a pandemic from a government perspective from a regulatory perspective.”
Furthermore, Dokuchaeva explained, the biggest challenge in financial services and in any other heavily regulated industry is the need to map regulations to policies to processes to people to internal controls and see a straight-through-line of how the organisation complies with all the requirements. Given the increasing complexity of threats and the growing volume of data to analyse, current compliance processes that rely largely on high levels of manual, repetitive and data-intensive tasks are simply inefficient and yield a relatively low impact in terms of detecting risk and fraudulent activity.
Dokuchaeva said, “We’ve seen lots of manual processes for keeping these documents up to date, and we’re talking about thousands and tens of thousands of documents such as policies and procedures, legal contracts, and further documentation (client-facing documentation). We’re talking about large volumes of high-risk content that needs to be updated.”
Indeed, as regulators demand more and more transparency, financial institutions need to produce and manage an increasing amount of data which includes gathering, analysing and computing all the necessary data. However, much of this data gathering and analysis still includes manual processes – a huge cost-driver for firms. This is where companies such as ClauseMatch come in. Its platform was brought out from the point of pain across organisations trying to manage a large volume of documents describing the ways of doing business and processes, be it a financial crime, ALM policies, operational risk policies, etc, Dokuchaeva added.
Furthermore, regulators too are upping their tech to keep pace with the industry. According to Thomson Reuters’ Fintech, Regtech, and the Role of Compliance 2021 report, in March 2020 RegTech achieved 10 years’ worth of growth in three months. Dokuchaeva said, “there is a lot of drive to start authoring, drafting and publishing regulation in a digital machine-readable format.” For instance, the availability of digital handbooks and accessibility to them via public API provides an ability to intake a regulation into the business quicker and make an assessment of the impact it has in a much more programmatic automated way and therefore enhances the implementation of that regulation. “Cost savings, efficiency, automation are the benefits for the regulated firms,” she added.
Touching on the upcoming trends in the RegTech industry, Dokuchaeva said that more companies have started prioritising ESG. And CLauseMatch is constantly rethinking its strategies to become increasingly sustainable. “I constantly look at things through the prism of what I can do from ClauseMatch perspective in the ESG space. Can we make our product more accessible for people with disabilities? Can we build the platform with sustainable design in mind, watching our carbon footprint?,” she added.
Going forward, the question lies how can RegTechs enable technology to drive what a regulated firm blueprint should look like. In addition, how can they look at assessing the reality of the regulated firm and identify weaker spots or areas of greater exposure to prevent those unintended consequences?
“For ClauseMatch it was about finding a way to turn regulatory rulebooks into the machine-readable machine-executable format. Regulations are complex bodies of text that require deep subject-matter knowledge and understanding in order to implement compliance within a firm,” Dokuchaeva said. “The goal is to identify the impact of regulatory obligations on the business and streamline the implementation of regulatory requirements and changes. In other words, how to ensure that internal documentation and processes are up to date with regulatory requirement and are compliant.”
In conclusion, financial firms need a sustainable, scalable and cost-effective solution to analyse enormous amounts of data more efficiently, identify suspicious activity more easily, and improve and accelerate risk detection and remediation. And, RegTech systems slash the time required to carry out complex analyses and checks, while improving accuracy, and data quality – the only solution to scale and adapt to the modern threat and regulatory landscapes.
Watch the full video here.
Copyright © 2018 RegTech Analyst
