Using Technology to Combat Rising Cost of Compliance

There have been a lot of complaints as regards the high costs of regulations and JWG in London have come up with some numbers regarding that. Known for its focus on financial controls, JWG has observed that there is a continuous increment of the scope of regulations.

In describing the MiFID II, 1.7 million paragraphs and over thirty thousand (30,000) pages were used, with the cost of implementation running to over €2.5 billion. The interpretation and re-writing of these rules into computer code and business texts consumed most of the implementation cost. And there seems to be no end in sight for the problem.

Between 2009 and 2012, more than fifty thousand (50,000) regulations were published across the G20, which later on rose to more than 50,000 regulatory updates in 2015, almost twice that of 2012. This appears to reciprocate Moore’s law in the field of computing where there is a Regulatory Law, which means that the operational burden of regulation control will double every few years.

According to PJ Di Giammarino, the CEO of the company, the G-20 Pittsburgh summit will be next ten years. Reform plans with a whole lot of regulatory waves which completely covers the financial market were launched by the G20’s 2009. However, the issue at hand is keeping the policies, procedures, and systems under control with both the regulators and the market demanding new ways of doing business.

It has thus become imperative to apply technology due to how complex and voluminous regulation is. Various findings on management were cited in a report from RegTech Council (RTC).

As estimated by Brain and Co, Governance Risk and Compliance (GRC) expenses are to the tune of 15-20% of the cost of running the bank and 40% of the cost of changing the bank. The Trade published in their research that banks spent more than $100 billion on regulatory compliance in 2016 alone and the price is not decreasing. Taking a look at the specific regulations, Dodd-Frank has cost $36 billion to date.

The above figures show that the €2.5 billion cost of MiFID II is still reasonable. It has been estimated by Duff and Phelps that there would be an increase in the regulatory costs from 4% to 10% of revenue by 2021.

The volume of the regulations has been a significant driver behind rising cost. The challenge posed by the regulatory compliance to the financial industry is premised on the fact that at least 45 new regulatory related documents are issued every week. And according to the council, this should be seen as a standard procedure which business must adhere to.

Di Giammarino said that realizing how enormous the change program approach decided upon by the regulators took everyone a long time. Financial institutions and regulators are demanding that the regulatory change process should be managed better this year. 90 institutions are now members of the RegTech council founded by the JWG, comprising 20 big firms, 20 regulators, and 20 technology players as well as academics and trade associations.

Di Giammarino further said that it ensures that it is secured to discuss the type of RegTech the industry needs and how it can be gotten collaboratively.

It is now difficult for banks to pinpoint who owns the regulatory change movement. Banks hardly have a head of organizational change. They do have heads for others like innovation, corporate horizon scanning, administrative operations, regulatory delivery program management, including the RegTech. However, the service of a chief data officer is needed to agree to the same cause across programs to put things together. But there remain vast differences between regulatory crowd and data officers as regulations are not easy to interpret, has deadlines that must be met and has a quick impact on business. Bank fiefdoms have started diminishing due to cost pressures.

The MiFID II budgets were up to nine figures last year, and this made people see the need to rationalize their method of regulations. It will also be better if banks develop an approach like that of factories to process the different regulatory changes instead of having a workbench per new rule. It is expected of the factory to have a single definition for the version of the compliance truth of its business and put everything under change control. Doing this requires more than using. docs, .pdfs, .xls and .ppt

Having the FCA and the Bank of England as critical players in the RegTech gave the UK an edge in the RegTech and also because they are in the same city with most of the technical talents. Europe has 28 members while the US has many federal regulators, including a slew of state rule-makers.

Coping with this requires financial firms to switch from using Microsoft tools for analog processing to digital processing which will enable everyone to be on the same platform. It involves digital filtration of regulations and routing them to the appropriate firm or a department in a firm to be interpreted by the business. The work here is to make it a rule that both human and machine can access.

The complexity of doing this has already been envisaged by the FCA, which explains why it pioneered a model-driven approach that can be executed by a machine for a simple report.
Getting the right meaning for definitions was not easy. Regulators had to be called upon to clarify the purpose of a retail bank account and connect the numbers asked in their report back to IFRS 9 standards for computing the field required. What was written in the rulebook cannot be understood by just looking at it unless one knows what the definition of retail is?
Using technology to allow people to have control over the rulebook remains a safer, faster, better and even cheaper way of doing it.