A new paradigm for regulatory change
Paul North, BNY Mellon: regulatory change is constant
Regulatory change is constant in the financial services industry. Moreover, the costs of managing regulatory change, compliance and risk for the financial services industry is increasing year-on-year. It is potentially unsustainable.
Bain & Co estimates that governance risk and compliance expenditure accounts for 15-20% of “run the bank” cost and 40% of “change the bank” cost. Banks spent over $100 billion on regulatory compliance in 2016 alone and it is estimated that regulatory costs will rise to 10% of revenues by 2022.
However, after a period of considerable regulatory change, culminating in the implementation of MiFID II, the financial services industry may have – at least for now – enough breathing space to consider some alternative ways of addressing this regulatory challenge.
A new paper, A New Paradigm for Regulatory Change and Compliance, 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 – puts cost, complexity and volume to the heart of the challenge.
It suggests that the industry may require a radical new approach that is underpinned by collaboration, semantic standards and technology. The solution it sets out, supported with a proof of concept, 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 to explore how straight-through processing (STP) for regulations could enable regulatory compliance. The proof of concept (PoC) was a working demonstration of how a small and specific number of MiFID II rules on product governance apply to functional activities in an investment bank. The outcome of the proof of concept illustrated that is feasible to move towards a new paradigm in terms of how regulators write rules and how firms interpret them. The financial services industry can move away from the existing analogue-era regulatory compliance processes towards a new paradigm underpinned by semantically enabled digital standards.
The proof of concept showed that there are benefits that go beyond cost savings – these include enhanced data governance, quality and accuracy. It 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.
The prize for the financial services industry of getting this right is huge. 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.
By Paul North, EMEA head of product management, BNY Mellon, and co-author of “A New Paradigm for Regulatory Change and Compliance”.
