Regtech exists primarily to help fund firms stay out of trouble. But as Nicholas Pratt finds, these tools of compliance could help build better businesses too.
The rapid growth of the regulatory technology – or ‘regtech’ – sector begs the question of whether regtech is any different from the various compliance tools and technology that have been developed over so many years.
A report from Deloitte Ireland, ‘RegTech is the new FinTech, How Agile Regulatory Technology Is Helping Firms Better Understand and Manage Their Risks’, attempts to answer this question.
The report says that regtech companies typically have four characteristics – agility, speed, integration and analytics.
The report goes on to say that regtech companies provide asset managers with the tools to use “existing systems and data to produce regulatory data and reporting in a cost-effective, flexible and timely manner without taking the risk of replacing or updating legacy systems”.
The current interest in regtech is borne of the realisation that new technology can be applied not just to compliance, but just as readily to creating wider value in a business. “Previously there was a focus on ticking the [regulatory] boxes rather than seeing what else the technology could do,” says Bill Gourlay, chief executive of The Idea Group.
Investment management compliance has traditionally focused on front-office activities such as best execution, market abuse surveillance and automation. But Kimberly Yurisich, head of digital at asset management consultancy Alpha FMC, says the focus has widened to include the more data-intensive areas of regulation, such as conduct of business rules, and ‘target markets’ and product governance standards under the Markets in Financial Instruments Directive II (MiFID II).
“Firms are looking to hoover up data from all their various applications,” she says. “MiFID II has been a big driver of that because of the reporting challenges it creates.
“Managers need to bring all of that reporting together.”
REGULATION AND BEYOND
Given the spending needed to meet regulatory requirements, it makes sense for asset managers to accrue some benefit beyond compliance. They might want to be able to improve product development by using all the performance data they are required to collect, for example. Similarly, all the data collected about customers to meet ‘know your customer’ (KYC) rules and, more recently, ‘know your distributor’ (KYD) rules and other product governance requirements, could be used to make businesses perform better.
Transaction cost analysis tools, which are necessary for meeting the regulatory requirement of providing clients with best execution, are another example of how technology to support regulatory duties can be used to develop business performance in the wider organisation. In this case, the tools could be used for developing new dealing strategies, adding value across different departments.
Although disruption – a word that appears so often in discussions about fintech – might seem incongruous with the aims of regulation, it is nevertheless the case that much impetus for regtech has come from regulators themselves. The UK Government Office for Science released a report back in March 2015 urging regulators “to engage the fintech community in automating regulation and compliance to create a state-of-the-art regulatory reporting and analytics infrastructure, which we have called ‘regtech’”.
Funds Europe has put together a list of seven providers to show how varied the regtech landscape is – from well-established data management vendors like DST, to providers specific to asset management.
It should be noted that even global custodians are striving to prove their fintech credentials – for example, in September BNY Mellon appointed Niamh De Niese to head up its new Innovation Centre, while other custodians have invested in their own fintech labs and accelerators.
And then there are companies like France-based 3D software company Dassault Systèmes, which have their foundations in other industries, such as life sciences, but see the opportunity to apply the same principles to financial services compliance.
There may also be a greater opportunity for collaboration in the regtech world between technology vendors, service providers, regulators and asset managers than in the wider fintech market where the talk of digital disruption – such as robo-advisers, or peer-to-peer lending which to some extent compete with asset management as a savings vehicle – can often be an unwelcome distraction.
With ever-increasing regulations and reporting requirements, it’s more important than ever for asset managers and other fund providers to have an effective compliance monitoring programme in place.
©2016 funds europe