How Can We Maximise Regulatory Technology & Avoid Its Potential Pitfalls? What recent results from the European Banking Authority and ESMA reports show
The European Banking Authority (EBA) has recently published an analysis looking into the RegTech landscape in the EU. The report assesses the many benefits, challenges and risks of the use of RegTech in the EU and lays out the steps to be taken to support the sound adoption and scale-up of solutions in this sector. The study also proposes actions designed to enhance the knowledge and skills of the competent authorities (CAs). ESMA has also published a report on Trends, Risks and Vulnerabilities of the Financial sector dedicating a part on RegTech and SupTech and the change for Markets and authorities. This report highlights that market participants are increasingly using new automated tools in a variety of areas, while potential applications of new tools for regulators include greater surveillance capacity and improved data collection and management. When technology is used for compliance, it is called Regulatory Technology or ‘RegTech’. Regtech is defined as any range of applications of technology‐enabled innovation for regulatory, compliance and reporting requirements implemented by a regulated institution – with or without the assistance of RegTech provider. RegTech solutions in Financial Institutions (FIs) and Investment Firms (FI’s) are currently evident in: Anti-Money-Laundering and Countering the Financing of Terrorism (AML/CFT) – for example, providing solutions for sanction screening or remote onboarding of customers. Fraud prevention – through automated behaviour and transaction monitoring. Prudential reporting – supporting institutions in their regulatory submissions. ICT security – providing detection mechanisms for an institution’s operations security. Creditworthiness assessments – providing new capabilities for assessing the creditworthiness of clients. Regulatory Reporting – supporting institutions in their trade reporting. Risk Management Benefits According to financial organisations using RegTech solutions, their key benefits are improved risk management, better monitoring and sample capabilities, and a reduction in human error. At the same time, RegTech providers place heavy emphasis on their ability to increase efficiency and effectiveness and quell the impact of ongoing regulatory change. Some of the increasing disparities in perspective between financial institutions (FIs) and RegTech providers suggest that further research of the benefits afforded by RegTech solutions is required. ESMA also believes that the move towards a more data-driven and pro-active approach will enhance monitoring of the financial sector and help ensure better outcomes for market participants and consumers. The continual push for efficiencies and cost savings, particularly for back-end and legacy systems as well as for labour-intensive processes will increase the use of RegTech in the foreseeable future. Risks EBA highlighted that when not implemented correctly, RegTech solutions may also generate risks for FIs that would need to be identified, monitored and managed. These risks may relate to, for example, compliance, concentration, business continuity, ICT and security, reputational issues, internal governance, conduct and consumer protection, and/or technology. RegTech may also create new risks for CAs supervising FIs. These include potential difficulties in assessing the effectiveness and reliability of the technological solutions used by FIs, and a potential lack of skills and tools needed to supervise the use of technology enabled RegTech solutions and, say, audit the underlying algorithms. ESMA focused on the risks and challenges for regulators and market participants in the areas of data collection and management, digital transition and failure on the part of market participants to adapt to the new digitalised infrastructure and the need from regulators to invest in the technological tools and human skills that will allow them to effectively analyse the results, operational risks and the risks from strategic incentives such as developing expertise in RegTech. Challenges The EBA report suggests that the majority of challenges to RegTech market development involve internal factors within the FIs and providers. Likewise, ESMA considers most of those challenges to apply for FIs. However, a lack of common regulatory standards across the EU could also constitute a barrier to the wider market adoption of RegTech solutions. The main challenges from the FI perspective are summarısed as follows: Data-related challenges and cybersecurity threats: FIs often indicate data quality, data privacy and protection, lack of data integration, data availability, and lack of data standardisation and harmonisation as issues. Interoperability and integration with the existing legacy systems: FI legacy systems and processes have too many silos, making RegTech adoption difficult, and this is further compounded by doubts about the ICT capacity of FIs to support FinTech, RegTech, and InsurTech solutions. Changes to regulation: changes with national or international regulations and other regulatory challenges can be another key barrier to RegTech adoption. Costs and procurement process: RegTech solutions seen as part of compliance and usually treated as a back‐office function may be at risk of underinvestment. Lack of necessary skills and training: when working with either in‐house or external RegTech solutions, FIs need specialists, e.g. data scientists and engineers, to be able, where relevant, to scout, assess, operate, and maintain updated RegTech solutions. Perceived immaturity of RegTech providers’ solutions: FIs that see RegTech as a potential competitive advantage often cite the lack of available and mature RegTech solutions as a challenge. Challenges from the RegTech provider perspective include: Lack of technological capabilities – the lack of some clients API capabilities and lack of standardisation are perceived as obstacles for technical integration. Security, data privacy and protection issues – privacy regulation may be one of the key constrains for FIs from sharing datasets with RegTech providers. Changes of national and international regulation – complex and continuously evolving regulatory landscape is perceived as a challenge, in particular on prudential reporting, fraud prevention and AML/CFT. Cost of user acquisition – a challenge, especially for recently established and smaller RegTech providers. Lack of FI understanding of RegTech solutions –it appears to RegTech providers that FIs may not be fully aware of all advantages that RegTech solutions may bring. Lack of harmonised legal and regulatory requirements – RegTech providers perceive the lack of harmonisation of regulatory requirements across the EU and the lack of regulatory data standards to be obstacles for wider market adoption of RegTech solutions. Clarity of regulatory/supervisory guidance – RegTech providers consider the lack of regulatory/supervisory
Complyport Tech presents extensive opportunities for firms in the future, Thomson Reuters survey shows
Can corporate governance and the culture of financial services firms keep up with the pace of growth of regulatory technology? During the past several years, regulators have invested heavily in technology to protect and monitor regulatory reporting data quality. The main challenges for 2021 will focus on new regulations, preparing for those with effective dates this year and those that are going through the legislation, proposal and comment processes. This leaves financial services firms with no option but to address automated reporting as a way of validating all data submitted to regulators, detecting and correcting data issues as they arise, and setting up an overall data governance framework across different regulatory reporting requirements. Thus, Regulatory Technology (RegTech) is crucial for operational management and strategic decision-making for both the risk and compliance functions as it is designed to help firms understand and meet legal requirements more effectively and efficiently. According to Thomson Reuters Regulatory Intelligence’s 2020 annual survey report “RegTech and the role of compliance in 2021”, despite firms facing several budget challenges during the pandemic, the adoption and implementation of regulatory technology has taken a huge step forward with 70% of the surveyed firms reporting that COVID-19 increased their reliance on technological solutions. The study, which shares the experiences of more than 400 compliance and risk practitioners, found that this sector’s growth is expected to accelerate in the coming months and years. Firms and their customers are realising the great value of adopting a wide variety of Fintech solutions. The survey also shows that firms must be careful to deploy solutions on solid foundations. This means getting corporate governance right. A quarter of respondents said that corporate boards and the risk and compliance functions need to be more involved in finding and adopting Fintech solutions for the firm, highlighting the absence of appropriate skill sets as one reason for this lack of involvement. Moreover, RegTech applications continue to provide popular, embedded solutions for firms in areas such as compliance monitoring, financial crime, AML/CTF, sanctions and regulatory reporting. Budgets are predicted to increase with a mix of in-house and external solutions as the option most frequently selected by respondents. Interestingly, just 16% of firms reported they had implemented RegTech solutions, with a further 34% stating that RegTech solutions were affecting the management of compliance. Notably, the report identifies a shift from build to buy; firms that employ inhouse solutions fell to 6% in 2020 from 17% in 2019, while 12% reported that all of their RegTech solutions were developed externally. Why choose Complyport Tech to be your regulatory technology partner? Complyport Tech is a leading and award-winning regulatory technology provider for the financial services industry, specialising in reporting solutions arising from the requirements of a number of complex and challenging international regulations such as EMIR, MiFID II/MiFIR, SFTR, FATCA, DAC6 and CRS. Complyport Tech also provides innovative and comprehensive solutions for Best Execution Monitoring, RTS 27/28 Reporting, AML Transaction Monitoring and Screening, Trade Surveillance (Market Abuse), and eKYC (Screening, eIDV, Document Authentication). Industry Pioneers Complyport Tech was one of the first providers in Europe to report under the European Market Infrastructure Regulation (EMIR) with 1.5 billion+ transactions successfully submitted since February 2014. The company currently supports over 170 B2B global clients, having been recognised for the Best RegTech Reporting Solution for 2019 by Finance Magnates London and named as one of the 100 most innovative RegTech companies in the world for 2020 and 2021 by RegTech Analyst. LSE-listed brokers, including some of the biggest CFD brokers in the world, currently use Complyport Tech’s innovative solutions. RegTech Experts Complyport Tech is not just a technology company that develops software to help clients report. At the core of its offerings lies compliance. Complyport Tech provides quality assurance that the reporting obligations are correctly covered in terms of data quality. If the need arises, the firm can also directly support businesses before any national competent authority without needing any external third-party advisory or assistance. Complyport Tech can directly and uninterruptedly report to a number of EU national competent authorities. Complyport Tech’s products have been repeatedly tested and passed several rigorous reviews by EU regulatory authorities, providing full transparency for both clients and EU national competent authorities. Moreover, the company offers financial institutions the unique facility to comply with a firm’s reporting obligations before the regulatory authorities, carry out audit trails, and conduct their own reconciliations. Complyport Tech has managed to successfully and innovatively combine the compliance and technology functions with both of its teams working in close unison. This allows the company to be flexible, efficient and effective in supporting the many new, demanding and dynamic requirements of the global RegTech world.. The team’s combined expertise underpins the company’s success in providing targeted solutions to its clients and addressing their reporting needs across a diverse regulatory landscape. One-Stop RegTech Provider Complyport Tech’s solutions are all delivered under the Polaris Platform, the company’s single and powerful RegTech tool. Besides transaction reporting, the Polaris platform combines, under a single unit interface, unique solutions such as Market Abuse Surveillance, AML Transaction Monitoring, Best Execution Monitoring, RTS reports and CRS/FATCA reporting, among others. This allows Complyport Tech to package its offerings to its clients by reducing direct and indirect costs, maintain a single point of contact for support and access to the system, and avoid the need of multiple integrations with various vendors, thus saving clients both time and resources. Impeccable Support Services Complyport Tech’s dedicated and experienced support team specialises in regulatory reporting, providing continuous support on what is needed to master transaction reporting requirements. This starts from the onboarding phase and covers the whole process up until the initiation of the live reporting, the handover of the platform to the client, and ongoing day-to-day support. Unparalleled Compliance Expertise Complyport Tech is a member of MAP S.Platis Group, a leading financial services consultancy group in the region that maintains one of the largest and most experienced teams of financial services compliance experts in the EU. This ensures that