Many banks I talk to see regtech purely as a way to beat their competitors.
This is the opportunity sold to them by management consultants; advisors who trot out the line that regtech can “transform compliance into a competitive advantage”. In other words, regtech can help banks, and other regulated institutions, bash their competition faster and more cheaply than before. This is, of course, a very effective way to sell regtech.
But, as a regtech CEO, it also disappoints me. In my view, the real opportunity presented by regtech is its ability to unleash the power of collaboration in the compliance sector. And rather than helping just a few mega-banks, it could well transform the industry as a whole.
Compliance is not a profit-making enterprise
As a sector, we need to start by being honest with ourselves. I think sometimes we hear so much about “turning compliance into a competitive advantage”, that we start to believe this toxic line ourselves. We might even find ourselves repeating the same line to our managers and executive teams to justify higher budgets and expenditure.
Of course, as with many things, it has a grain of truth. Something seems right about it. We recognise that if we spend less time and money on compliance than our competitors, then we can invest more in other areas of the business – and that will give us a true advantage over our competitors.
But this logic goes out of the window once we recognise that we can save even more money – much more – on compliance if we work together. And these savings can run into the billions. This unproductive capital can then be reinvested in more productive areas, driving growth and results across the whole sector. We can all win from collectively lowering the cost of compliance together.
No one loves spending money on compliance
As regulated organisations, we all comply with the same laws and regulations. We all grapple with the same problems. We all spend, very roughly, the same massive amounts of money on compliance, reportedly adding up across the industry to as much as $70 billion annually at the last count.
This provides fertile ground for collaboration – and the creation of tools that enable it. On a day-to-day basis many of us are solving the same problems, interpreting the same legislation, scratching our heads about the same implementation timeline. In fact, the challenge you solved today – or didn’t solve, as the unfortunate case may be – is something that may have already been solved, and most likely has, by someone just down the street. What’s the sense in all this energy and money being wasted over and over again?
The solution is to create a space where this knowledge can be made searchable to all. A crowdsourced resource where the whole industry – from lawyers, compliance officers, and even the regulators – can upload, access and download best practice and know-how themselves. An actionable knowledge-driven community. A hive of regulatory information and knowledge. A go-to resource for tackling difficult and costly problems.
The time for collaboration is now
This collaboration is needed now, perhaps, more than ever before. We are going through a period of historic regulatory change. And it’s getting harder each day for banks, and other regulated organisations, to handle this regulatory storm on their own.
Vast swathes of new regulations have come onto the global law books since 2008. All designed to make the international financial services system more secure. For example, the massive FRTB is necessary, but is projected to cost banks $5 billion to implement. And it has to be done by 2019. It’s difficult to imagine how banks are going to be able to meet this deadline on their own; and it’s what many compliance officers’ nightmares are made of right now. Collaboration and sharing knowledge would make it much, much easier – maybe even achievable.
There are signs that some organisations are starting to think this way. Project Sentinel is a case is point. A collaborative initiative by a group of banks, it mutualised the cost of MiFID II implementation in the OTC front office. It provides evidence that banks can come together to share best practice, and save time and money.
Where regtech fits in
But where does regtech fit it? Can’t we all simply form a regulatory club? Hold more conferences, or publish more books and know-how documents?
The problem is collating, systematising, and making all this knowledge and know-how accessible. The regulations themselves run to millions and millions of words – if not billions once you add in regulations from other industries, like insurance, pharmaceuticals, advertising, agriculture, food, and countless others. The know-how associated with all these regulations must, then, run into the billions. A few more conferences will not help us surf on this sea of information, or help us fish out the one piece of relevant information that we need at the right time.
And that’s where the latest technology fits in. In the past it would have been impossible for compliance officers to be able to make use of all this data. The latest machine learning and AI can help us comb, sort, and sift this information, not only giving us the ability to find information when we want it, but also increasingly pre-empting our needs and serving us information that we might not even know that we need.
For example, when implementation deadlines are coming up, AI can provide compliance officers with relevant material, perhaps showing information about aspects of FRTB that are not only overlooked, but also relevant for their type and size of financial organisation.
But whatever the future holds, it’s becoming clearer every single day that the way forward is not for banks to use regtech to create more battles with their rivals. Rather than a race where we're all running – very slowly – towards the finish line, regtech provides us with the opportunity to use technology and our own compliance expertise to create a vast, bespoke vehicle together; one which will carry us all there much faster and at a much lower cost.