What are the current challenges of RegTech and how can innovations help? We talked to Randeep Singh Buttar, a founder and CEO of Compliance as a Service Ltd. He represents a RegTech company that helps financial services institutions enhance how they achieve compliance and deliver regulatory reporting. In addition to this, Mr. Buttar is an Interim Head of Data Transformation and Innovation at HSBC.
The regulations in the European banking industry are pretty strict in comparison to other regions. Is it good or bad, in your opinion?
I would suggest that they are actually quite adequate, given the fact that most of the regulations that have come out of Europe since the great financial crisis address the route cause issues that we had. So, for example, if you take the Basel III cords, these are really about ensuring that we have the right quality of assets on our balance sheet and that when we do have risky assets, they are offset by good-quality capital.
And so, from my perspective, when it comes to addressing things like the need for ongoing liquidity in the event of liquidity dry up, then absolutely, the regulations are appropriate. That’s just one case in point. There are many others. So, I wouldn’t suggest that they are strict. I think that they are direct requirements that are absolutely needed.
A single directive can lead to a big number of different variations. Considering this, how difficult is it to build a long-term transformation strategy for banks?
I think the key challenge for banks here is the volume of regulations. So, there are so many regulations out there that whenever a new one comes on board or whenever an existing one is changed, banks have to respond. Typically, in compliance, you tend to throw people at a problem, and that just leads to an increase in the headcount. Given the pressure that we have at the moment to cut costs across the industry, it is important that we get a little bit smarter and cleverer about how we address this.
So, what we don’t want to do is start from scratch, and what I think we need to do is look into ways in which we can determine the overlap between regulations. So, that’s one thing. Actually understanding how you can inherit regulation or compliance that you’ve already achieved from a previous regulation to meet the new regulation is another. And so, the strategy really stands from understanding how various regulations met back to your enterprise. Therefore, you can better determine your impact and also better plan against a future requirement.
How should RegTech initiatives be developed? Within a bank or through the cooperation with startups to comply with the last regulation?
I think it should be a combination of the two. I think, ultimately, there is a lot of internal in-house knowledge capital that needs to be leveraged whenever you are trying to reach regulatory compliance issues. However, the RegTech market itself is projected to be valued at 2.8 billion by 2025. And so, in light of that, we know that there is a burgeoning ecosystem. There are a lot of specialist companies there, where they can demonstrate expertise in a given regulation. We should be looking to partner up with them and lean on some of that good work.
Do you see potential in AI and machine learning to reinforce RegTech, especially in banking?
I think there’s a lot of potential for artificial intelligence and machine learning in the context of regulatory technology. In particular, when I think about reg reporting, absolutely, we need to have the ability to leverage those sorts of tools. But, for us to do that, there is the first step, which is having clean data that we can model on. The clean data will come from digitizing the regulation and disambiguating it, mapping it back to effective data and information that models your enterprise. Then, you can start doing interesting things with machine learning. So, when a new regulation comes on board, you can then determine how that regulation can be mapped to the existing areas of your enterprise and also map back to other regulations too to identify the overlap between them.
In addition to that, I would say that you can also use it to stop modeling other things like the cost of compliance, the future cost of non-compliance, the impact of a change in regulation, changing policy. So, I think there is potential for AI and machine learning in this sector.
How can SupTech drive the next-gen supervision? And why haven’t we witnessed the large-scale implementation of this technology yet?
I think it’s still early days for SupTech. It’s an area that is going to start growing quite quickly. If you look at the regulators themselves, the ones in the UK in particular, you will see that they wholly embrace the innovations and are driving in their direction. But again, this is all about data. The regulators and the supervisors want to understand whether or not a systemic risk is coming and where it is going to come from and how it can arrive. They really need to have the standardized data collected from across the industry to make those sorts of inferences.
So, I think there is undoubtedly an opportunity for startups to get involved in SupTech when they understand that need and that challenge. And, as you start contributing solutions into that dialog, that’s where you’ll see a lot more traction, from the regulators as well. And certainly, you can see it today in things like sandbox initiatives and accelerators.
How important is it for outsourcing companies to understand the regulatory standards?
From my perspective, the outsourcing companies should really be providing features and technology. That’s what will be useful in this context. Now, a lot of that is going to be quite generic. So, for example, do I really need to understand the nuances of a specific reg for me to implement or provide a solution around natural language processing, text analytics, semantic stitching, data matching workflow, that type of thing? These all are the sorts of features that I think are important in the context of reg reporting. And I don’t necessarily believe that the outsourcing companies or the startups need to really understand the underlying regulation to provide those types of generic and transferable technologies.
Having said that, I think it’s absolutely valuable if they come up and pitch, and do it in the context of a specific regulation. When they show knowledge of that regulation, then absolutely, it’s definitely going to be beneficial for them. It’s certainly going to make them a more preferential option. I’d also like to say that you will never get away from the fact that in-house, within the bank or an organization, you are going to have a lot more knowledge about the regulation. So, you know, the knowledge of an outsourcing company doesn’t have to be too deep, but there should certainly be a certain appreciation and understanding.
What are the biggest challenges to overcome in RegTech?
I would say that the biggest challenges at the moment are the increased levels of demand and the volume of regulation hitting the industry that is high and is continuing to rise. In addition to that, I would also say that it’s regulatory scrutiny. The regulators want a lot more information. They want it at a lower level of grain and a lot more frequently than they’ve done in the past. And so, that’s also a challenge to be able to actually source that data and information to respond.
And, finally, I would say it’s regulatory fragmentation. So, at the moment, you have divergence, sometimes even within a country. For instance, you can have situations within the US where you have state versus federal regulators looking at the same regulations in different ways. Similarly, I guess, across Europe, where you have EU member states, they legislate in different ways to different directives, or even around the same directive. You can see a variance in which ways a regulation is being interpreted and also translated into law. And I think that there is a need for more equivalence across the industry. That’s probably also one of the key challenges.
Modern technology is changing every sector of the economy, including RegTech. Currently, RegTech deals with a lot of challenges that technology can hopefully solve. Startups and existing businesses, providing technological solutions for the RegTech sector, should be able to solve the challenges with the help of AI and machine learning while having an understanding of how the sector and its regulations operate. Though it’s too early to talk about the era of SupTech taking over, we see it coming shortly.