02.12.2018

RegTech: From Tactical Fixes to Strategic Solutions

By Jordan Schwartz, Managing Director of Software, Cordium

Jordan Schwartz, Cordium

The merits of adopting a strategic approach to regulation are difficult to contest. In an ideal world, firms would have the foresight to examine all of their regulatory duties, across relevant jurisdictions, and address those requirements in their entirety. That would mean eliminating duplicative workstreams, making lasting changes to operations modeled on best practices, and implementing technologies that satisfy a superset of their regulatory obligations.

In reality, most firms are left scrambling to deploy tactical fixes to each new wave of regulatory reform. A recent study by Cordium and Aite Group suggested that a “lack of manpower and steady pipeline of compliance deadlines” helped explain why only 4% of respondents felt they had an entirely strategic approach to regulatory reform, while 46% said their approach was either entirely or mostly tactical.

So what can firms do to change this? What does it take to get on the front foot and implement the right strategic solutions to compliance? While there can be no single silver bullet, we outline some of the key factors that firms need to consider when it comes to the people, process and technology supporting their compliance efforts.

People

Taking a strategic approach to compliance requires a broad range of skill sets. At the very least, it requires a detailed understanding of existing regulations, their legal interpretation and operational impact on a firm’s business. It also requires visibility into future obligations. Armed with that knowledge, firms can start to anticipate the impact of upcoming changes, while developing policies, procedures and technologies that ensure compliance but incur minimal cost and disruption to the business.

Investment firms looking to adopt a strategic approach to compliance need engagement from across their senior management team. Compliance cannot be seen as the sole responsibility of the compliance officer. It requires support from across the firm—including front office, operations and technology teams—so that any new process requirement can be implemented in the most effective way possible.

Process

Regulation can have a direct impact on a wide range of business processes for investment firms. Whether they relate to product governance, fund valuation, best execution, marketing, distribution or record keeping – evolving obligations have significant implications for firms’ operations. A strategic approach to process management requires striving for best practices and staying ahead of the curve when it comes to ongoing regulatory reform. While compliance can often be seen simply as a burden, it can also offer opportunities to drive process improvement, reduce operational risks and improve a firm’s long-term competitive position by aligning its interests perfectly with those of its clients.

Unfortunately, re-engineering business processes to address regulatory reform is much easier said than done. Simply defining compliant operating policies is one part of the puzzle. But the harder challenge is making sure those policies really translate into standard operating practices. That requires a cycle of education, training and ongoing monitoring.

Technology

The term RegTech recognizes the strategic role that technology can play in minimizing the burden of regulatory reform. RegTech solutions can address a wide range of challenges, but some of the most pressing workflow requirements highlighted by the Cordium and Aite Group study include cybersecurity, various aspects of surveillance, AML and KYC obligations, regulatory alerts, issue tracking and case management, as well as policy management, attestation and reporting.

The problem is that deploying technology to automate compliance workflow is not a simple task. Firms are often afforded little lead time to develop solutions. Requirements can sometimes be unclear or require post-implementation consensus. Cross jurisdictional issues can complicate things further. The lack of internationally adopted data standards makes it harder to leverage a single platform to satisfy multiple use cases. Some rules may also pose outright jurisdictional conflicts, requiring significant care to engineer solutions that minimize the risk of non-compliance.

The Right Mindset

Tackling regulation strategically is clearly not a straight forward task. Yet nothing worthwhile is ever simple. In many cases, the first obstacle may be to adopt the right mindset or culture. The typical industry perception is to see regulators as an adversary; an impediment to doing business. Very few recognize the role that regulation plays in promoting best practices. Being strategic about regulation means being more actively engaged and acknowledging some benefits that regulation can bring. Only then can one begin to organize people, processes and technologies to dovetail more closely with the behaviors that regulators seek to promote.

To find out more about the evolving trends in the world of RegTech, download the Aite Group whitepaper here.

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