December 28, 2021
Browsing for a topic for our last TrendLetter of 2021 I came across this article, https://www.cclcompliance.co.uk/knowledge-centre/post/regtech-what-has-it-ever-done-for-us
We’re a few years further ahead and the answer to the question posed is not final and the question is more if it ever will. RegTech has delivered a lot but there are still many areas where more can be expected. That also means that – as long as RegTech has not brought solutions for many problems in the financial services industry – financial institutions need to cope with the current way of working and find ways to improve. Let’s look at two of these topics that are important in that aspect.
First there is the issue of data quality or better of poor data quality. The more automation a financial institution wants to implement and the more artificial intelligence a bank wants to apply, the more data needs to be available and the better the data need to be. Let me give a simple yet real life example. In many banks the type of industry that a (corporate) client operates in, drives risk ratings. At the same time it’s not uncommon that at client onboarding the industry type is not adequately determined; I have seen client databases where more than half of the clients had industry type ‘999’ or ‘other’, which is clearly the easy and fast way out when a client wants to open an account. There are RegTech solutions in the market that can – with reasonable accuracy – determine the correct industry type of a company, using internal and external data (be it publicly available or in subscription databases). These are of course RegTech solutions which do make the repair of data easier, but is this the type of progress that the industry needs? Since the financial institution is not really addressing the cause of the problem. Best would be to ‘clean the house’ and take measures to ‘keep the house clean’ but few financial institutions take data repair and ensuring faultless data capture serious. For those of you interested find some more details in this McKinsey report https://www.mckinsey.com/business-functions/risk-and-resilience/our-insights/optimizing-data-controls-in-banking
A second issue is efficiency. In the absence of all-encompassing RegTech solutions, many process steps require manual intervention. Think of client outreach to obtain client sourced documents needed for CDD, handling of false positives in transaction monitoring, discarding negative newsfindings and all these other tasks that compliance operations teams execute on a day to day basis. One way of improving quality and speed while reducing costs is to find dedicated microservices to tackle one issue at a time or find niche solutions for instance to deal with TBML. Another way is to accept that manual process steps are unavoidable and ensure staff are well trained or bring in experts to organise and execute the operational processes. That sounds perhaps like an open door but many financial institutions manage their compliance operations processes and departments as an afterthought.
Although RegTech has delivered on some of its promises, RegTech providers haven’t tackled all challenges and more developments are needed and expected. At the same time many financial institutions have not yet implemented any solution at all and even early adopters still have not completed their digital transformation. So both on the side of RegTech developers and financial instutions there’s more work to be done.
If any of this rings a bell and you want to discuss how the challenges you face can be tackled, you’re of course most welcome to get in touch for an introductory conversation.
December 2021
Rolf van der Pol