Financial technology has displaced the 2008 financial crisis as the main issue driving the international regulatory agenda and RegTech. As such, it is likely to have a significant influence on compliance professionals in 2020.
RegTech: State of regulatory reform 2020
One regulator has described the digitisation of financial services as “sweeping over the industry like a storm”. Regulators have had the opportunity to study cloud computing providers, big data, artificial intelligence and blockchain at a somewhat leisurely pace as financial institutions familiarise themselves with new technology, deploying it cautiously – according to the State of regulatory reform 2020 report.
The focus has been on understanding both the risks it poses and the benefits it might deliver. As adoption of new forms of technology accelerates, however, regulatory reliance on them will also gather steam.
This will increase the sophistication of oversight and require regulators and the financial industry to use systems that integrate more seamlessly than ever before. Big data and artificial intelligence analytics are becoming more widely used by banks’ financial crime teams, which are grappling with the dual challenges of reducing fraud and detecting suspicious transactions. Banks and vendors say they can reduce false positives and track customer behaviour, all of which enables analysts to spend more time investigating high-risk transactions.
Elsewhere, RegTech’s benefits have been slower to materialise. There are hundreds of vendors promoting a raft of solutions that promise to make compliance and regulatory reporting easier. That could be by bringing more automation or by helping the market to better understand the rules and regulations.
Banks, however, have yet to digitalize compliance in a comprehensive and meaningful way. Banks are investing heavily in risk and compliance but in many cases they are still using reliable, legacy technology and processes. In many cases, their IT systems are disconnected and outdated, with data stashed in different silos. In this environment it is hard for many compliance teams to justify deploying advanced RegTech solutions.
The lack of standardised risk and regulatory data — a hallmark of the 2008 crisis — still remains a fundamental problem for the incumbent financial services firms. This is hindering the potential of RegTech and advanced analytics to transform the sector. It is also presenting an opportunity for neo-banks and other FintTech players to steal a march on their competition by building systems that are “digital native” and big-data-centric.
Aside from technology, culture remains a problem. This is notably visible in Australia, where conduct and operational risk problems persist nearly 12 months on from the landmark Royal Commission. In the latest development, regulators have accused Westpac of 23 million breaches of anti-money laundering laws, saying the banking giant ignored red flags and for years enabled payments from convicted child sex offenders and “high risk” countries.
The bank faces a billion-dollar-plus penalty and is expected to settle the case as quickly as possible in early 2020. Goldman Sachs, meanwhile, is still negotiating a multi-billion dollar settlement over its role in the 1MDB scandal in Malaysia.
Compliance professionals will need to keep a close eye on the US government in a presidential election year. Regulators will seek to finish rulemaking before the pre-election uncertainty begins. A bitterly divided Congress is unlikely to overhaul regulations, but election-year proposals and political campaigns will provide an insight to the future agendas of the victors. The Supreme Court also potentially faces questions on healthcare and financial regulation.
The UK’s recent general election has at least delivered certainty after three years of logjam following the Brexit referendum vote of June 2016. The passage of the Withdrawal Act through both houses of parliament shortly before Christmas means the financial services industry can prepare for the next stage of the trade negotiations between the EU27 and the UK; it remains to be seen, however, whether these will conclude before 2021, the oftstated goal of the Johnson administration.
At a geopolitical level, uncertainty remains as the introduction of trade barriers threatens to reverse the flow of prosperity that has come with the rapid globalisation of finance and trade. In addition, the United States is enforcing economic sanctions ferociously, which is having flow-on consequences for banks and multinational companies across a range of sectors, including technology and telecommunications.
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