Partnering is a solution to the regulatory “new normal”

In a time of upheaval the world over, and in one in which the narrative around innovation and digitisation is being rewritten on a day-to-day basis, financial institutions are discovering new challenges and solutions when it comes to dealing with regulatory compliance.

“We’ve entered different territory in the last eight to ten weeks,” says James Buckley, vice-president and Europe director for Infosys Finacle. “Until the COVID-19 crisis there was a ‘new normal’ in terms of regulation and meeting the standards regulatory regime. It had also been a significant part of the workload that banks deal with.”

“There had been an increasing set of frameworks around both the systemic risk level and on the customer transparency level,” says Buckley. This had been creating an increasing amount of effort required by financial institutions.

James Buckley, Infosys

Now, he says, the “new normal” is a rapid scaling of digital capabilities together with a situation where the risk landscape is mutating. “Up until ten weeks ago there was plenty of VC capital floating around to service a large number of fintechs and that backdrop has changed fundamentally.”

Banks and financial institutions are trying to digitise as fast as possible and virtualise a lot of their face to face interaction in the wake of societal changes wrought by coronavirus. This creates a situation in which the regulator has to speak to a bank trying to keep its core business running while simultaneously attempting to rapidly digitise.

“This means that regulators are in a much more active mode right now,” says Buckley. “They’re working with banks and others that are trying to work through the minefield of using various fintechs to create their digital journeys.” He adds that there are “probably hundreds of initiatives across the banks in Europe alone” across the financial services sector where regulators are actively monitoring and engaging with banks. “The issue now is that the speed at which some of these projects have to be done really requires the regulatory regime and the regulators to work quite closely with the banks to ensure that they can effectively maintain a compliance framework.”

The industry is in a situation where banks and financial services organisations were looking at fintechs to circumvent the heavy regulatory regimes and provide ancillary capabilities to banks like marketplace aggregation. Yet a headache arrives for banks when the question of liability arises, says Buckley. “They have to be liable for the compliance and regulatory
regimes around these particular fintechs, unless using them for off balance sheet,deregulated, allied initiatives.”

With banks attempting to digitise rapidly in the face of the challenges brought on by coronavirus, risks are bound to be around the corner, especially as they aim to cut costs. “One of the first things that happens in a rapid downturn is that banks cut discretionary spend, and a lot of that falls on consulting spend,” says Buckley.

“What happens when you cut back on that is you start to remove change capability around digitisation but also around compliance. Various compliance programmes begin to grind to a halt. It gives them a very short-term relief in terms of budget but leaves them shorthanded when it comes to implementing fast changes.”

Those rapid changes are happening right now, according to Buckley, as at the board level in Europe a “change fast and survive” mentality is taking hold to avoid seeing market capitalisation drop through the floor in the medium term.

The good news is that banks are aligning themselves with fintechs emerging in a world where compliance is their bread and butter. For example, there are fintechs that are borne out of applying themselves to solve items like Open Banking and the second Payment Services Directive (PSD2) from inception.

But even these fintechs are finding that one size doesn’t fit all and that their attempt to scale may be difficult. There are nuances between banks when applying tech solutions, says Buckley, and you can’t go to 100 banks with the same solution 100 times, because each financial institution will have a different operating model. To that end, collaboration between
fintechs and banks, and proactive input from regulators, will be a cornerstone of this regulatory “new normal”.