Written by: Paul North | EMEA Head of Product Management, BNY Mellon Asset Servicing
The costs of managing regulatory change, compliance and risk for the financial services industry is increasing year-on-year, and is potentially unsustainable.
According to a new paper for the RegTech Council that I co-authored with Tom Butler, Professor in Business Information Systems at University College Cork, and John Palmer, Head of Data Architecture at the Bank of England, addressing this challenge may require a radical new approach that is underpinned by collaboration, semantic standards and technology.
Our paper, A New Paradigm for Regulatory Change and Compliance, puts cost, complexity and volume to the heart of the challenge. The regulators themselves share in this challenge as they write rules and seek to monitor financial firms. For example, it took 1.5m paragraphs across 30,000 pages to describe the rules in MiFID II. The subsequent cost to the industry of MiFID II is €2.5bn, and counting.
The solution set out in our paper, which was commissioned by the RegTech Council – an independent body of individuals who work for regulators, financial institutions, academia, standards bodies, professional services firms and the technology supply chain – is a standards-based approach to regulation established through cross-industry collaboration and the application of new RegTech solutions.
There is no supervisory or competitive advantage in uncoordinated individual approaches to regulatory compliance. Instead, through collaboration between regulators, financial firms, technology firms and academia, practical outcomes can be developed that will benefit all participants – including end consumers – in dealing with regulatory change and compliance.
Such practical outcomes can be based on semantically enabled digital and computational models that will radically transform regulatory compliance change management. Rather than being based on one or more proprietary technologies, the use of fundamental industry standards permits the integrative use of several technologies and so reduces adoption and switching costs.
The RegTech New Initiatives Working Group implemented a proof of concept using this approach and we found that there were benefits that went beyond cost savings – these included enhanced data governance, quality and accuracy. We also found, however, that technological solutions on their own are not sufficient. Cultural change among financial services companies, technology suppliers and regulators is required.
There are significant cultural and institutional obstacles to be negotiated in transitioning to the proposed new paradigm. For example, regulatory policy writers will need to move away from complex, purpose specific specifications that operate typically from a position centric perspective, to a more general purpose, simpler but precise specification that is data centric. Similarly, managers within financial services companies will have to adopt different mind-sets when considering matters such as the formation of business models, policies, strategies, objectives, processes and products. The semantics of each need to be expressed and captured in a business knowledge base.
Our paper concludes that the prize for the financial services industry of getting this right is huge. Moreover, immediate action is needed to transition from analogue to digital ways of working. The cost of delay is significant given the accelerating pace of regulation. The faster the collective transition to the proposed new approach set out in the paper, the greater the savings and the better the outcomes.