Over the past decade, an ongoing increase in new regulations that affect a wide range of industry sectors has prompted many CFOs to explore new ways to achieve compliance.
Keeping up with changing regulatory requirements can be tricky, and while these new rules are designed to strengthen the commercial environment, they potentially add an extra level of pressure on business in an increasingly competitive world.
This complex situation has been a driving force behind new technology solutions, known as 'RegTech', which help businesses tick regulatory boxes – and much more.
Gleb Shinkarsky, a Senior Principal of Promontory Financial Group, an IBM Company, says that RegTech refers to technological solutions that can be used to help improve efficiency and effectiveness of regulatory and compliance processes.
“It's important to CFOs because it can help reduce costs, increase efficiencies and give the board and C-suite greater confidence around compliance risk management," he says.
New regulatory regimes
Some of the new regulatory regimes that were the catalyst for the rise of RegTech include Dodd-Frank regulations in the US, Basel I, II and III and new regulations in foreign exchange markets.
“The array of regulatory changes has resulted in substantial increases in the cost of compliance," he says, citing research by professional services firm Deloitte.
Deloitte's paper The Future of Regulatory Productivity, powered by RegTech, found operating costs of regulatory compliance for retail and corporate banks have increased by more than 60 per cent since the financial crisis of 2007/2008.
“RegTech has emerged as a response to these issues. It has been enabled by technological advances in artificial intelligence and machine learning, natural language processing and big data analytics," Shinkarsky says.
“It is driving improvements in the efficiency and effectiveness of regulatory compliance," he adds.
As Corrs Chambers Westgarth Partner Philip Catania explains, 'RegTech' means different things to different people.
“In layman's terms, it's technology that assists in reducing the cost of regulatory compliance," he says.
But despite the cost, the RegTech sector is growing fast – and seems to have found a permanent niche.
“It's necessary because regulatory activity and the cost of compliance is rising, and organisations have to employ more people and resources to ensure they're compliant," Catania says.
“Whether businesses are complying with new financial services, data privacy or anti-competitive conduct regulations, they need bigger teams examining the business of the organisation. Technology can help reduce the cost of compliance by automating many processes," he explains.
Major themes for 2018
CFOs have an opportunity to explore many different areas when it comes to RegTech this year.
One is identifying the right technology to reduce the cost of compliance.
“Companies will be recalibrating where they spend their compliance budget. This is all about using technology for mundane reporting and compliance requirements, so the team can focus on growing the business," says Catania.
He says it's important to explore all the options before deciding on any new approaches to compliance in the business. “Think about how you can use RegTech to recalibrate your capital."
Catania's second piece of advice is to view RegTech as an opportunity to establish a point of difference for the business in the market. Systems designed to help the business meet its compliance obligations could be used to guide the way it collects customer data in a potentially market-leading way and produce timely information to track how the business is going.
“CFOs can use RegTech as an early warning system to tell them what the business is doing well and what it's doing badly," Catania says.
Credit checks are a good example. This process is still largely manual, with information required from many sources and is often still delivered as hard copy documents that require human analysis and manual intervention.
Technology solutions can be employed to help streamline this process, combining and analysing different sources of information to determine whether to extend terms to a third party.
These solutions might offer greater accuracy, reliability and efficiency than a similar manual process, freeing up people in the business to work on projects to add value to the firm or finance team.
Cultural change and implementing RegTech
Shinkarsky believes that the RegTech movement appears set to gather pace and with many of the major planned regulatory reforms almost finalised, many businesses are currently directing their efforts towards implementation.
A 2017 survey by professional services firm Accenture shows 89 per cent of financial services executives expect the cost of compliance to increase in 2018.
“Ensuring accurate and timely regulatory reporting continues to be a major focus," Shinkarsky says.
“Increasing requirements around data transparency and the introduction of new data privacy and protection laws add complexity to day-to-day activities."
In the future, he expects the maturation of the emerging fintech sector will produce an array of new, multi-jurisdictional regulatory challenges.
Being able to respond to market disruptions and fintech innovations is expected to be critical for RegTech in 2018 and beyond.
Says Shinkarsky: “RegTech will also be an enabler for regulators by empowering them with new and innovative supervisory tools. For example, machine learning can enhance efficacy of the monitoring and surveillance function and assist to leverage data across various agencies to develop predictive algorithms as a preventative control to misconduct."
For many CFOs, the challenge might not be just about investing in the right RegTech solutions which help their staff do their jobs more efficiently, but also in finding the appropriate culture that supports their teams to make the most of the new technologies.
“Compliance plays a key role in building organisational culture," Shinkarsky says.
He says that regulators are now saying they want to see business cultures that put customers' interests first.
“Customers who are satisfied because their interests are being put first are more likely to remain loyal and so bolster a firm's bottom line," says Shinkarsky.
Apart from offering assistance in the way the business complies with its regulatory obligations, RegTech also has the potential to support efficiencies across the scope of the broader business over the long term.
- Opportunities exist for CFOs to automate low-level compliance activities such as report preparation.
- Finance team members can potentially focus on value-adding rather than procedural work.
- Implementation could require cultural change as well as an investment in the right technology.
 Compliance: Dare to be Different - Accenture 2017 Compliance Risk Study https://www.accenture.com/t20170405T131043Z__w__/us-en/_acnmedia/PDF-47/Accenture-Compliance-Risk-Study-2017-Dare-To-Be-Different.pdf accessed 19/02/18