Credit: StuartMiles from FreerangeStock
Complying with regulations is not only challenging, but also costly, especially for banks.
Bain & Company estimates that governance, risk and compliance costs account for 15 to 20 percent of the total operating cost for most major banks globally in 2016. A LexisNexis Risk Solution study last year also found that financial institutions in China, Hong Kong, Singapore, Malaysia, Indonesia and Thailand are conservatively spending an estimated US$1.5 billion on anti-money laundering (AML) compliance alone.
One way of reducing such costs is to leverage regulatory technology (RegTech) to "automate mundane compliance tasks [such as reporting] and improve the efficiency of such activities," Craig Davis (pictured below), Asia Pacific Head of Financial Risk Management, KPMG in Singapore, told Bank IT Asia.
He explained that compliance reporting in most banks is still very much a manual process. "The spreadsheet culture is [still] big within most banks when it comes to compliance. They will take information from legacy platforms, and manipulate that data in spreadsheets. While this gets the job done, it is costly, fragmented and manual, which increases the chances of error."
Automating such processes using RegTech thus allows banks to redeploy fewer, highly-skilled compliance manpower away from routine processes, and towards analysing output and applying critical judgment to machine reporting.
Enabling banks to be agile
As banks transform themselves for the digital era, regulations need to change accordingly. This poses a problem for traditional compliance solutions as they are usually inflexible and designed to deliver only specified and locked down requirements.
RegTech solutions counter the shortcomings of traditional solutions by using advanced analytics and assessment techniques to learn and support the assessment of new and emerging regulations based on what has been previously done, according to Deloitte.
"Solutions today are more agile, relying on robust data amalgamations, combining diverse and apparently unrelated operational data in the search for more comprehensive and reliable regulatory compliance answers," Tim Phillipps (pictured below), APAC Financial Crime Network Leader and SEA Forensic Partner, Deloitte, shared with Bank IT Asia.
Since RegTech can help banks slice and dice information as and when required, such tools can also "contribute to revenue generation and creating market opportunities," Phillipps added. "RegTech allows banks to experiment with data and make it available across the broader organisation - from customer relationship manager to the compliance leader." For instance, RegTech can enable banks to leverage relevant data from multiple sources for better customer credit analysis and underwriting of small business loans.
Simply put, if RegTech is implemented correctly, it can help banks improve efficiency, optimise costs, while delivering enhanced experiences for customers - all of which contributes to business growth.
Some Asian central banks receptive to RegTech
Even though it is still early days for RegTech, some central banks in Asia have taken initiatives to encourage its growth and adoption.
For instance, the Monetary Authority of Singapore (MAS) introduced a regulatory sandbox last June to enable startups as well as financial institutions to "experiment with innovations in a live environment without disrupting the entire banking system," said Greg Knieriemen, Chief Technology Strategist at Hitachi Data Systems.
He added that Hitachi and Bank of Tokyo-Mitsubishi UFJ (BTMU) is using MAS' sandbox to test the use of blockchain technology to issue and settle checks in Singapore. The test aims to identify issues from various perspectives such as technology, security, operation, and legal.
Similarly, the Hong Kong Monetary Authority launched the Fintech Supervisory Sandbox last September to facilitate fintech trials of authorised financial institutions before they are scaled up. Just two months after its launch, two banks applied to test the use of biometric authentication for securities trading in the sandbox.
Besides offering sandboxes, Asian regulators need to tweak existing regulations to enable banks to adopt and benefit from RegTech. "RegTech requires a number of other technologies such as the cloud, in order to be viable. The MAS has made changes to the outsourcing requirements to enable the cloud to be used. We heard that regulators in Australia and Hong Kong are following suit and planning to enhance their own outsourcing requirements," Davis shared.
Agreeing with Davis, Phillipps said: "[Asian central banks] need to create an environment in which innovation and designed experimentation is encouraged and rewarded. They need to be a partner in the development, not simply an observer."
What to look out for before adopting RegTech
When asked what needs to be done before adopting RegTech, Davis advised banks to first understand the regulatory landscape and initiate proactive discussions with regulators around grey areas.
"For instance, approaches utilizing forms of artificial intelligence may seem like a black box because the machines learn on their own, unlike traditional methods that may be more transparent though are limited in scope or application," said Davis. This makes regulators uncomfortable as it is not clear as to how the machines derive their conclusion, even if they are more accurate. "So banks and regulators need to come together and understand how it works and affect existing back-end systems, as well as discuss about the types of controls to put in them [before embracing such technologies]."
Phillipps added: "Regulators and [banks] are in this together. It's a journey that requires [both to be] willing to design and experiment, to challenge existing approaches and long-held folklore."
Next, banks should assess existing and emerging technologies in their own organisations. "There are a number of technologies-both new and those that have been around for a while-that are becoming more useful because we now have other linking technologies such as cloud, and greater access to computational power," said Davis.