I recently sat down with a colleague to chat about RegTech because it’s such a hot topic. Anne Leslie-Bini is director of RegTech for the global consultancy BearingPoint and is based in Paris, France. I’ve known Anne since she began working in the XBRL (eXtensible Business Reporting Language) space helping companies adapt technologies that will let them digitally tag business information (using the XBRL data standard) for compliance filings to regulatory agencies around the world, such as the U.S. Securities & Exchange Commission (SEC), Her Majesty’s Revenue & Customs (HMRC) in the U.K., or the Ministry of Corporate Affairs (MCA) in India. More than 140 programs around the world are using the XBRL standard for digitizing information for regulatory oversight, the capital markets, and sharing of data across government agencies.
Brad Monterio: Anne, what is RegTech and why now?
Anne Leslie-Bini: RegTech is about exploring innovative and smart ways of leveraging technology in the area of regulation. To really get a handle on what it’s all about, it’s important to strip out the hype and understand where the term came from. RegTech is emerging as a response to the tsunami of regulations, such as Dodd-Frank and Basel III, that we have witnessed since the 2008 financial crisis, which, in turn, is generating an additional burden of cost and complexity for industry. In a business context that continues to be challenging, banks and financial services are struggling to find new ways to widen their revenue streams. On top of this, these same firms are having to foot a heavier regulatory and compliance spend, which is further constraining their bottom lines.
Banks are continually seeking solutions to solve their revenue and cost challenges. This is where RegTech comes in. In the short term, it’s comparatively easier for firms to find ways to reduce costs than it is to increase revenue, particularly in the current economic context. While banks are figuring out how to transform their business to remain relevant in the digital age, RegTech is seen as a way of giving their P&Ls a welcome “vitamin shot” by helping them to perform compliance tasks more efficiently and at lower cost through smart partnering with specialist technology providers.
Instead of trying to build and maintain solutions in-house or to rely on a single enterprise platform that inevitably will cover some but not all requirements, more and more financial services firms are testing out niche providers on specific problem issues that would otherwise be too costly to deal with using traditional approaches. As RegTech can have an immediate impact on operating costs, it’s not hard to see why it’s a hugely attractive proposition for banks.
This dynamic has caught the attention of regulators in a positive way. We’re seeing the supervisory authorities themselves adopting new technologies to improve how they perform their own activities. Project Innovate, launched by the U.K.’s Financial Conduct Authority in October 2014, is an encouraging example of how supervisory bodies are reinforcing how they collaborate with industry. Through structured and agile experimentation, programs like this facilitate new forms of interaction between stakeholders and “de-risk” the process of embracing new technology and innovative approaches to resolve some of regulation’s most wicked problems.
Brad: Let’s come back to that in a moment. We’ve heard a lot about FinTech (financial technology) over the last couple of years. Is RegTech just FinTech with a new name? Anne: No. FinTech is specifically about financial technology, and it’s a different beast, although some of the undercurrents are similar. FinTech is about new applications of technology to the business of banking and financial services: It deals with reengineering the value propositions offered to customers, how companies interact with these customers, and how they partner with other organizations to deliver differentiated products and services. FinTech uses cutting-edge technology to do all of that in a digital marketplace. For example, European regulations such as PSD2 (Revised Payment Service Directive) are supporting the creation of a “virtual” infrastructure of APIs [application programming interfaces] to drive electronic payment services as reimagined by a host of new market entrants. PSD2 effectively removes traditional banks’ monopoly on their customers’ account information and opens the door to any new entrant. RegTech, on the other hand, focuses on using a savvy combination of deep domain knowledge and technology to help financial services institutions remain compliant with the myriad laws and regulations that govern their activities, such as the international Basel accords or European directives such as MiFID II [Markets in Financial Instruments Directive] that have business impacts that go far beyond the strict geography of Europe.
There are a number of dynamics that are common to both FinTech and RegTech, including how they both lower the cost of doing business by reducing friction and redundancy (by making data easily accessible and readily reusable) and by shaking up incumbent rules of industry engagement (be it with customers, external partners, or regulators). Fundamentally, the subject matter itself is different. FinTech focuses on reinventing traditional banking and payments services from conception through delivery. The emergence of digital challenger banks such as Monzo and Tandem is a good example of what we are seeing in this space. RegTech, on the other hand, is a growing software toolset which is relevant to all regulated firms who provide financial services, regardless of whether it is on a B2B or a B2C basis.
The purpose of RegTech is to help regulated firms ensure that they are fully compliant with national and supranational conduct and prudential regulation in the most efficient and cost-effective manner so that they can stay focused on their core mission while simultaneously supporting better supervision for enhanced financial stability. FinTech is disrupting why these regulated financial services firms exist, whereas RegTech is shaking up how they exist from a compliance perspective. While today RegTech is primarily focused on the financial services sector, there isn’t really any barrier to its evolving further and taking hold in all regulated industries.
Brad: Talk to me a little about RegTech and cost reduction. Is that sustainable over the long term?
Anne: In compliance, as in any domain, you can go only so far in reducing costs because you eventually hit a hard floor below which you just can’t trim away any more “fat.” And looking at RegTech simply as a vector to reduce compliance overhead is a limiting and shortsighted view that belies a wealth of hidden value. In focusing exclusively on cost reduction, stakeholders are missing a truly golden opportunity to reengineer the regulatory compliance value chain, and that’s where the real promise lies. The emergence of RegTech is creating a global conversation where regulators the world over are taking a closer look at the “why” of regulation and beginning to challenge some of the legacy assumptions around “how” they regulate. This, in turn, is creating an opportunity to engage all the stakeholders present across the full gamut of the regulatory value chain and examine the role they play.
RegTech is inciting regulators to change the lens with which they look at their role and mission so that they refocus on strategic intent and their overarching purpose as supervisors. The R2A RegTech for Regulators initiative is a great example of this where we are seeing private-public partnerships across continents between supervisory authorities and software providers, supported by financial backing from NGOs [nongovernmental organizations] and philanthropic foundations, to deliver regulatory approaches that are fit for a digital age of inclusive finance. The first cohort is mobilizing teams in Mexico, Ghana, and the Philippines on prototypes that focus on consumer protection, data analytics, and anti-money-laundering/combating the financing of terrorism (AML/CFT). We can expect that supervisors and central banks in other countries will follow suit so that this valuable learning process is shared and iterative.
Brad: So long term, this is more about having an opportunity to disrupt old regulatory models and paradigms, particularly on the strategy and policy side, and flip the paradigm to more of an investment in the future, not a cost. Now what about the technology component: What’s happening there? What new technologies are regulators looking at?
Anne: Data is the lifeblood flowing through the regulatory ecosystem. Each of the various data sets prepared by companies and reported to regulators is valuable in its own right, but if the data sets don’t fit together as part of a bigger strategic purpose, a major opportunity is being missed. One of these opportunities is to bring regulators together on a sort of global digital agenda with a data and technology strategy at the heart of it.
There are multiple technologies being looked at by regulators—particularly Big Data and machine learning—to help them overcome the shortcomings of their current processes and approaches. Right now, Big Data is increasingly being used in the statistics functions in an effort to optimize the data sets that central banks manipulate—and the Banque de France’s Data Lake project is emblematic of the trend we are seeing. But I feel the shift among regulators will be toward even greater use of machine learning and artificial intelligence to help them with detecting weak signals and possibly as an aid to complex decision and policy making.
Brad: So tell me more about those challenges.
Anne: One of the most challenging areas is the origination of regulation. Oftentimes, regulators formulate regulations as a reaction to something bad that has happened, which means that they are often playing a game of “catch up,” trying to remedy an unacceptable situation and prevent it from happening again. The focus is on punishing the violators, not on incentivizing good behavior. We are seeing the limits of the “stick” approach to regulation, so maybe it is time to rethink how we could formulate a regulatory framework that acts as a “carrot” to reward good behavior instead of only punishing deviations from expected norms. A big step forward would be if we could find a way to turn regulations into code. Having access to regulations in the form of machine-readable code would help regulators take stock of existing regulations more efficiently, avoiding duplication, redundancy, and potential contradiction in the rules and the processes used to create them. This is a situation frequently encountered in Europe where national discretions continue to coexist with harmonized supranational directives imposed across all member states and individual regulatory frameworks overlap with each other, which can cause firms to report almost-identical data multiple times.
Technology would play a central role in that effort. Legacy regulatory formulation processes often involve manual and error-prone methods based on outdated document-management platforms with version control and information-sharing issues that contribute to chaotic and inefficient environments. In many ways, regulators today are trying to regulate in the digital data age using analog and document-centric solutions.
Progressive regulators are already looking at newer technologies as a way to overcome some of these challenges. Imagine what could be accomplished if something like machine learning were integrated with other types of RegTech and structured data standards like XBRL or distributed ledger technologies like blockchain. For instance, the U.K. Financial Conduct Authority, in collaboration with the R3 consortium, RBS [Royal Bank of Scotland], and another major global bank, has built a prototype application for reporting of mortgage transactions on R3’s Corda distributed ledger technology (DLT) platform. This collaboration between two major banks and a national regulator demonstrated how DLT’s shared data model can enable continuous regulatory reporting for financial institutions, which is precisely the type of disruption needed to existing data transmission mechanisms between firms and their regulators.
But there’s still a gap to be bridged here. Recently I read that about a third of RegTech startup companies have never spoken with a regulator! How is that possible? There is clearly a disconnect with the human/domain expertise side of the equation that is required to bring technology and regulation together. But some regulators are working to change that dynamic. A groundbreaking approach called AuRep in Austria has demonstrated that, when there is a compelling business case and resolute commitment from influential stakeholders, it is possible to mobilize a national central bank and over 800 banks to achieve convergence around a shared national regulatory reporting platform that delivers business benefits across the board in terms of enhanced data quality and economies of scale. AuRep represents a paradigm shift in how regulatory reporting is performed, moving away from aggregated data in template form to granular data collected in the form of cubes which are analysis-friendly by design and which enhance the supervisory capability of the national central bank (OeNB).
Brad: Which countries are leading the way with RegTech innovation?
Anne: There is a great quote from Pablo Picasso: “Learn the rules like a pro, so you can break them like an artist.” The crucial first step to delivering value with RegTech is mastering the complex mechanics of the regulatory domain and then daring to challenge the orthodoxy with fresh thinking. Leveraging the vast array of new technologies offered, some regulators in Europe, Asia, and the Middle East are doing just that and leading the way with groundbreaking approaches. In the U.K., the Financial Conduct Authority was one of the first movers, launching Project Innovate in 2014, with Bank of England launching its own accelerator for innovation in 2016 and Banque de France recently following suit. This European dynamic has caught the attention of many other supervisory authorities around the world, with the Monetary Authority of Singapore piloting a know-your-customer (KYC) data utility as a way of making it easier for banks to comply with anti-money-laundering (AML) regulations. And we are seeing other innovations in Asia and the Middle East. For example, Abu Dhabi Global Market (ADGM) and the Central Bank of Bahrain (CBB) have recently launched sandbox programs, with similar initiatives in Hong Kong and Dubai, all designed to fuel innovation by attracting startups and stimulating investment. It’s really an exciting time for RegTech!
Brad: Anne, thank you for your insight into what is clearly a quickly evolving practice among regulators and financial services institutions around the world in leveraging technology to improve their own ecosystems and information supply chains. These ecosystems involve a variety of stakeholders, including report preparers such as banks, insurers, investment banks and brokerages, corporations, technology solution providers, auditors, accountants, attorneys, data aggregators, and many others.
The Future: Endless Possibilities
Management accountants play key roles—CFO being one of the more prominent ones—at many of these stakeholder organizations, and RegTech and FinTech are two areas about which they should be learning more. The excitement around innovation and disruptive models like RegTech breathes new life and energy into the profession, which has the added benefit of showing young accounting professionals and students thinking about careers in management accounting that there are endless possibilities for their career pathways. RegTech and FinTech are certainly two possible entry points, and “InsurTech” (insurance technology) and some of the other inevitable related outgrowths will provide them even more future opportunities.
Management accountants are already wearing multiple hats as financial executives who also serve as data stewards, data analysts, and reporting experts in many organizations touched by RegTech and FinTech, so, in many ways, this foray into these two areas is a natural extension of a pathway on which many are already progressing. I’ve long believed that the intersection of technology, accounting/finance, and business was an ideal place for management accountants to work. With the rise of RegTech and FinTech, this intersection is enhanced, bringing with it even greater synergy and raising management accountants’ value within their employer organizations.
There also is value for IMA® (Institute of Management Accountants) members who aren’t employed in organizations that are part of the RegTech or FinTech ecosystems. Study the new models and innovative approaches used to solve key information and process challenges for regulators and financial services organizations. These are an excellent source of inspiration and a catalyst for management accountants to innovate within their own organizations and sectors through the use of technology to improve the way in which information is created, validated, analyzed, and communicated.
Data Amplified: The Future of Business Reporting
RegTech and FinTech are among the important technology topics on which the IMA Technology Solutions and Practices Committee focuses because they impact our members in multiple ways, whether reporting compliance information to a regulatory body, using technologies to drive growth and value, or helping technology vendors deliver their solutions to the market.
As a consultant to XBRL International, Inc. (XII), the standard setter for the XBRL structured data standard (IMA is one of the founding organizations for XBRL), I’m helping XII attract experts and innovators to the new Data Amplified conference (www.dataamplified.org) and community to share ideas about RegTech/FinTech, talk about standardization of data in regulatory reporting, explore how new technologies like cognitive artificial intelligence or robotics fit with structured data and analytics, and strategize about the future of business reporting.
Given the activity and buzz around it, RegTech is certainly in fashion, with some regulators already leading the way to a new frontier for the regulatory process. The issues raised by Anne Leslie-Bini around the challenges and opportunities in RegTech are part of the focus of Data Amplified as it’s designed to be a platform for sharing and collaboration in this space—a sort of incubator for new models and approaches to business reporting. This can serve as an inspiration or catalyst for how management accountants innovate their business reporting.