RegTech: Riding the new waves of regulation

By RoryMcLaren, senior vice president of regulatory services at Deutsche Boerse  

As with any new industry buzzword, one of thefirst challenges for a sector can often be defining it. Terms will often meandifferent things to different people, not just because of their literalmeaning, but often because of the connotations a word can have. ‘FinTech’ is aprime example of this – looking at it broadly, it is the application oftechnology to anything financially related, but for many it may also implydisruptive innovation and the challenging of traditional practices. ForRegTech, the latest industry buzzword, we are experiencing the same challenge. Butwhat exactly is ‘RegTech’?

The Financial Conduct Authority (FCA) has adopted a fairly broad definitionfor RegTech, assigning it as a term that covers all ‘new technologies thatfacilitate the delivery of regulatory requirements in the financialworld. However, whilst this broad andcomprehensive definition is useful to summarise the meaning, it does notilluminate the detailed areas where RegTech is finding traction.

In the post-global financial crisis world, thevolume and intensity of regulation has reached levels that would havepreviously been unthinkable. Every factor has increased in the regulatoryuniverse: processes covered, participants involved, products in scope. Overlappingand cross referencing regulations are impacting one another and compounding thechallenges, often with unintended consequences.

These changes in regulation have resulted inthe industry reaching a point of inflection where many of the processes, toolsand strategies that were previously applied to regulation are no longer fit forpurpose. Often this is not a sharp cut-off, rather a slow degradation inperformance, so firms are often tempted to stick with established mechanisms,which can be costly in the long run.

RegTech can be applied in many different waysto the regulatory problem, several examples are described here to give aflavour of the sector:

The monitoring and management of regulatorytext by the market participants and regulatory software providers receives asignificant part of the budget associated with regulation. The primarymechanism for communicating the complex intentions of a regulation thatencompasses financial product categorisation, process change and IT systemsimplementation is a lengthy document, often produced as a compromise betweendifferent member state participants and finally translated into a variety ofEuropean languages. The opportunity for misinterpretation and misunderstandingis vast.

To combat this, we are seeing the emergence oftools, spawned from bibliography and other text oriented environments, which aimto address the semantic spirit of the regulation from the array of documentsavailable. These tools provide analysts a better way to capture the regulatoryinformation, monitor and incorporate changes, spot areas of inconsistency and providea single viewpoint that the rest of the process can rely upon. Importantly,these tools can remove a lot of the variance between interpretations.

The unprecedented scope defined by modernregulation means that more data has to be captured and processed for regulatoryreporting purposes than ever before. All this against a dynamic market thatstill has to continue to function regardless of the regulatory burden. Someorganisations are looking to new cloud technologies to determine whether therecan be a cost through efficiency saving in this space. Consider the elasticcompute capability that cloud platforms can provide and how this can beleveraged to cope with peak processing demands in a cost effective manner. Orthe ability to design in the appropriate scalable storage strategy based on thedata volume and requirements over time. The decision to use cloud computingservices may be balanced by the need for strict security, however we can seethat opinion in this space is slowly moving with comments provided in the recent FCApaper on use of cloud computing resources and their recent decision to basetheir own Mifid II regulatory reporting repository on a cloud environment.

A final example of RegTech would be the movetowards increased modelling of aspects of regulation whether it be throughdecision modelling techniques, domain specific languages or semantic modelling.Increasing the collaboration between business, regulatory, operations andtechnology staff is a key aspect in producing a workable response to theregulation that satisfies all stakeholders. These examples of RegTech allowparticipants to model and communicate aspects of the regulation in ways thatare useful to all participants. For example, some organisations are modellingthe validation process of Mifid II Transaction reporting data through decisionmodelling tools. This is more comprehensible to the business stakeholdersinvolved, but can also be transformed into an executable service that is usedas part of the operational solution. This can improve efficient andcollaboration when implementing a regulation and also aid when implementing theinevitable changes.

As with many new tech initiatives it remains tobe seen whether RegTech will fail in the Trough of Disillusionment or succeedon through to the Plateau of Productivity, but there are certainly enoughchallenges in regulations and enough proponents of the technological change topush the movement forwards. The real power will be realised for RegTech whenmarket participants can turn what is essentially an unwanted cost centre into arevenue generating, business value enhancing activity. Let’s hope that’ssomeday soon.