“Regulated firms should make full use of regulatory technology this year” says Thomson Reuters, citing massive changes ahead

The year 2017 looms ahead, with its first month having almost drawn to a close, giving rise to commentary on research conducted by large institutional entities in this industry with regard to how the remainder of 2017 will look in terms of specific action required by electronic trading companies.

Whilst Thomson Reuters’ core business is its multinational mass media and information entity, the firm owns corporate institutional electronic communication network (ECN) FXall, therefore is directly subject to navigating the regulatory changes that affect the electronic trading industry, as well as is responsible for creating reports and information on the matter.

Facing uncertain times, financial firms preparing for significant regulatory reforms this year are focusing on regulatory technology to help them respond quickly to the opportunities offered by change, according to Thomson Reuters annual report on the State of Regulatory Reform.
The potential dismantling of existing rulebooks in the UK and US is a risk but also an opportunity, the report finds.

Although Brexit and changes to the US Dodd-Frank Act may still be some years away, firms are preparing now to ensure their compliance functions are ready for all changes. A regulatory transformation is taking place at the same time as the financial industry races to develop and adopt new technological approaches to compliance.

Thomson Reuters considers that a new age of financial regulation will dawn in 2017, and that Donald Trump’s presidency and the UK’s planned divorce from the European Union are taking shape as the main drivers of an uncertain era of ‘dismantling’, even as the structure built since the financial crisis remains incomplete.

The transformation of the government role is taking place, furthermore, as the financial industry races to develop and adapt new technological approaches to compliance.

The company considers that compliance officers, who are in great demand in London, face change, change and more change, overlaid with the challenge of an increasingly wide range of sanctions being used by regulators to drive home the need for physically effective compliance and the resulting good customer outcomes. The uncertainty presents opportunities. Firms can seek to influence their futures rather than simply watching as rulebooks change.

Other regulatory reforms identified by the report include the increasing focus on personal liability, as regulations require named individuals in financial firms to assume responsibility for specific business functions. The report looks at each of the world’s financial regions in turn, summarizing the key regulatory changes underway and offering predictions on the regulatory events that will shape the year.

Thomson Reuters considers that the concept of financial technology, or fintech, has been firmly entrenched in the financial sector and the agenda of regulators.

From what was only, a few years ago, a relatively vague concept have now sprung more defined and specialized branches of technological innovation, often driven by financial institutions’ desire to find better solutions for regulatory challenges and business opportunities. Narrower definitions, such as “regtech,” “insurtech” and “edtech” have emerged, driving interest to new heights.

Today, FinanceFeeds spoke to Ron Finberg, Business Development at Cappitech, which is a boutique FinTech company which has a prominent regulatory technology division.

Mr. Finberg explained “I believe the biggest proof that regtech firms are providing value to the financial industry is the increase of major banks and brokers that are evaluating new technology to recommend to their clients.”

“At Cappitech, the feedback we are receiving is that beyond just lowering the overall cost of ownership to comply with new regulation like EMIR or MiFID I/II by using a regtech startup, large firms are looking towards improving their compliance quality with 3rd party solutions” concluded Mr. Finberg.

The traditional financial hubs of Hong Kong and Singapore have both signaled plans to become regional fintech hubs, although the fintech industries in those jurisdictions are far smaller than those in London and New York.

Regulators in both Asian jurisdictions have established fintech contact points,and the MAS and the HKMA have also launched supervisory “sandboxes” for testing new forms of technology in a safe environment.

Britain’s FCA was among the first global regulator to create such a ‘sandbox’, its necessity being paramount as London is the world’s leader in financial technology, from infrastructure to proprietary trading platform development.

So far, within large institutions, a vast amount of attention has been given to distributed ledger technology, also known as blockchain, which promises to reduce banks’ costs in several areas, including KYC.

RegTech is the new FinTech

Thomson Reuters considers that regulators are keen to see more technology adoption in compliance, with automation, machine learning and artificial intelligence (AI) advances likely to cut through cumbersome and paper-intensive reporting processes, a matter that FinanceFeeds has researched in detail recently.

Colloquially known as “regtech,” a growing number of solutions have emerged, and look set to reduce costs, compliance headcount and reporting time.

James Lau, the acting secretary for Financial Services and the Treasury in Hong Kong, said in November that banks were examining biometric technology and AI solutions that could go far beyond data collection, tabulation and basic analytics, helping banks manage unstructured data and strengthen surveillance and risk detection. This could help improve both trade surveillance and customer onboarding, he said.

While fintech and regtech are interrelated, both conceptually and in application, their origins differ. Regtech evolved from post-crisis regulatory changes and fintech trends, and extends beyond finance to any regulated sector. Fintech, on the other hand, is more about improving the technology of the original financial system.

Jack Ma, the founder of Alibaba, recently stated that an important component was to solve the problem of a lack of inclusiveness, particularly in emerging economies, where a relatively large number of people remain unbanked.

In China, services such as Alipay and WeChat have in recent years become highly popular payment systems, although neither is operated by financial companies. FinanceFeeds, having conducted substantial on-the-ground research across China’s national FX industry, can vouch that pretty much nobody at all uses email there, WeChat is the tool for all commercial interaction.

Australian regulators continue to concentrate on risk culture

“Risk culture” is expected to become a key part of the regulatory lexicon this year according to Thomson Reuters research, not just for banks but for all financial services licensees.

The Australian Securities and Investments Commission (ASIC), meanwhile, will focus on the connection between conduct risk and risk culture. Conduct risk is one aspect of risk culture that cuts across regulatory jurisdictions. ASIC is expected to focus on “tone from the top,” the dissemination of ethics and values across an organization, business practices, board accountability, staff incentives and governance controls.

ASIC is concerned that, in addition to inappropriate financial incentives, poor culture is one of the main causes of bad conduct within the financial sector.

Anti-money laundering (AML) and know your client (KYC) overhauls

The AML/CTF regimes on both sides of the Tasman will experience significant change throughout 2017 and beyond.

The Australian AML regulator has outlined its broad plans to simplify the AML/CTF Rules for more than 14,000 reporting entities in the year ahead.

In New Zealand, meanwhile, the government has expedited the second phase of its AML/CTF laws, which are set to be passedin the first half of 2017.

The two countries have taken divergent paths on AML/CTF regulation for so-called designated nonfinancial businesses and professions. New Zealand is focusing on rapid implementation, while Australia, which has been promising reforms for a decade, has emphasized the need for adequate consultation and a considered regulatory response.

In order to navigate intricate changes that will take place this year across the globe and ensure that no transgressions are unduly made, Thomson Reuters advocates the use of regtech by regulated firms in all major jurisdictions.

All in all, the regulatory and compliance environment is becoming as highly technologically advanced as the electronic financial markets that it presides over, thus keeping pace with technological change is an absolute necessity via digital means.

Photograph: Cappitech head office, Herzliya, Israel. Copyright FinanceFeeds