Managing the Compliance Challenge

compliance-4-17-18.pngSince the 2008 financial crisis, financial institutions have faced numerous regulatory changes that have transformed the regulatory environment and how they respond to new mandates. Implementing measures to comply with these new regulations has significantly driven up compliance costs, while the profit-facing sides of their businesses have suffered.

This has led to the commoditization and subsequent outsourcing of significant parts of the compliance process, resulting in a loss of subject-matter expertise and the capacity to deal with continuous regulatory change. The results have been typically suboptimal, and many financial institutions have been forced to downsize or, in some cases, shut down whole business areas to hire the necessary compliance staff to meet the regulatory deadlines.

What Needs to be Done
The rapidly changing regulatory landscape is forcing financial institutions to change the way they think about compliance. It is imperative that regulatory compliance becomes a bigger part of a financial institution’s overall strategic vision.

The current regulatory setup requires financial institutions to be proactive rather than reactive to change through strategic initiatives in three key areas: business model, operational efficiency and infrastructure.

Financial institutions can respond to future changes in the regulatory landscape by effectively incorporating regulatory compliance into their business strategy. This proactive approach gives more transparency to front-line and senior management, increases responsiveness to change and is ultimately less capital intensive.

Moreover, technology solutions can enable financial institutions to improve their operational efficiency through eliminating cost and time-intensive manual processes. Financial institutions can spend less money on hiring more compliance officers and more on the core business of the bank

How Regtech Can Help
Regtech can quickly equip financial institutions with a more efficient compliance setup at a cheaper cost. By becoming a key component of their overall strategic vision, regtech can improve their business intelligence and enable them to accelerate the compliance process.

For example, regtech solutions can facilitate and accelerate financial institutions’ regulatory reporting and compliance through the extraction of valuable, enterprise-wide insights from the vast amounts of structured and unstructured data they consume for their daily business operations.

Also, when applied to the area of Know-Your-Customer (KYC), regtech solutions can facilitate streamlining costly compliance procedures related to anti-money laundering initiatives through more effective customer identification tools.

Lastly, regtech solutions can increase efficiency and responsiveness to the changing regulatory landscape through automated scanning and analysis of regulatory publications and facilitating stakeholder decision making through identification of the impacted business processes, systems and units.

Implementing Regtech
Four key areas for effective implementation include:

Interaction with regulators: Carefully consider how regulatory agencies respond to new technology. It is important to start proactive dialogue with these agencies, early and often, to encourage open communication and convey the sustainable efficiency improvements.

Assessment of current IT: Examine your existing IT landscapes to identify what critical interdependencies and overlapping functionalities exist between systems, and how a new regtech solution could potentially integrate into the existing landscape. This last component is crucial: Financial institutions must identify how a new regtech solution will not only potentially affect the existing landscape, but shape how it continues to evolve in the future.

Strategic sourcing options: Analyze and define how a regtech solution is procured. The decision to build a solution in-house, buy a third-party license or partner with an established regtech company should depend on all the factors that directly impact the long-term operating model of the business.

Ease and agility: Choose a regtech solution that is designed to be implemented quickly, and in different configurations. This will enable the financial institution to implement a regtech solution in isolated portions of its processes while also fully adopting it within its end-to-end processes.

Regtech solutions are increasingly becoming a critical component in how financial institutions anticipate, approach and respond to the changing regulatory landscape. Regulatory compliance must become a largely automated and recurring process, and collaboration with regtech firms is key to meeting the regulatory challenges.

Mathias Hausherr