This thematic week will be devoted to Regtech, which includes all tool kits to deal with the Mandatory, Free service (to regulators, carrying out various mandates) that is very Costly to regulated entities.
My top tweet in the month June remains rock solid (inspired by a Finnovasia discussion):
#FinTech solves Consequences of last crisis
#RegTech prevents negligence on next day of Reckoning for similar sins
Suade, the UK Fintech focused on extinguishing the regulatory fires, says that the financial world will never be the same post Lehman Brothers. The Institute of International Finance report on RegTech, provides some anecdotal but quantitative analysis of the size of the problem:
The cost for a Single financial institution can be over $1bn every year
Are we depleting our resources, the oceans of revenues? Is this a environmental scale disaster? The subprime crisis of 2008, is exactly when financial engineering, creativity, and innovation halted within financial institutions (for the better or for the worse). Thereafter, we have seen an OTC market for financial innovation through unregulated Fintech startups. And an increase in IT spending within financial institutions in the order of billions with a disproportionate allocation to compliance and regulatory issues, despite the fact of significant tech cost reductions. This is #Regtech, whether from financial software vendors or cloud based modules from startups. All claiming to address the consequences of the subprime crisis, offering services to keep up with the non-digitized regulatory libraries that are evolving.
We are living in a world that demands from financial service providers to be able to perform as close to real-time as possible, three main functions:
Monitoring, Analyzing, and Reporting.
The US seems to be the most demanding country in terms of domestic and foreign corporate governance and securities laws, with erroneous disclosure requirements (e.g. Dodd-Frank). They also, merit the first place in terms implementing and front running Europe with strict foreign policy tax accounting laws (e.g. FACTA).
The fundamental difference between Europe and the US, is that Europe has taken a principal-based approach to regulation whereas the US has taken a rule based approach.
Europe shows more progressive signs in terms of privacy of data, transparency, Open APIs and regulations like PSD2 ; however, gets the first prize in term of broad scope of securities regulations (MIFID and related regs) and complexity of regulatory bodies from the various countries.
Europe already has three regulatory Sandboxes in place (UK, France and Switzerland to be launched). Whilst the US has none. The “Rest” is sprinting with Abu Dabhi launching a Sandbox (FSRA), ASIC in Australia also in the planning phase, and MAS in Singapore who took the lead.
Asia overall has a very small regulatory library compared to the West. Australia has its two main regulatory bodies ASIC (the SEC analog) and ARPA (The Australian Prudential Regulation Authority. Government imposed restrictions in Mainland Chain, revolve around currency controls and its consequences, to capital markets and investments. China is saying that “A change in regulatory philosophy before any formal institutional adjustments will help solve the problem”. So no massive regulatory legislation expected soon from China.
In this week’s coverage, we will be deliberately avoiding landscape reports.
On Tuesday, we will take a tour into the Regtech market opportunity in capital markets and investing; and the possibilities for growth.
On Wednesday, we look at how small businesses are affected from the regulatory burden.
On Thursday, we will look at the European regulation for insurance companies, Solvency II which is the Basel III analog.
On Friday, we will dive into PSD2 and its impact.
The broadest impact, the heaviest drawdown is clearly in capital markets and investing. Domestic markets and cross border considerations, are really complex. GRC considerations are also global with international vendor, supplier and customer relationships. We set aside all issues related to ID authentication simply because it is a separate and broader issue (not only for financial service providers) and merits a separate look.
Regtech is a B2B Fintech vertical. Regtech can be thought as the Cost of doing business, much like licenses, safety infrastructure, or mandatory insurance policies in other industries.
Financial service providers have to figure out how to offer a Cheaper (for their own sake), Better, Faster Service to Regulators.
A Mandatory free service, is what has been demanded!
Can Fintech make this triple-sided service (Monitor, Analyze, Report) Cheaper, Better, Faster?
Goldman Sachs and JP Morgan say they are Fintechs and talk about the percentage of engineers they employ. JP Morgan wants to be seen by financial analysts as a techquity. But I am sure that in both cases, their legal departments aren’t in any meaningful partnership with their data science – engineers.
For the financial industry to advance and stop being impeded by the Mandatory free services demanded (Compliance and regulation); there are three shifts that need to occur and that have not even started:
- Regulated Financial institutions need to bridge the silos between Legal and Data engineers.
- Regulators need to hire engineers and adapt more technology, so they can tap into the APIs of their customers (ironically, incurring the costs to offer them a free service)
- Governments need to invest in the development of the killer regtech apps, needed by financial institutions; therefore subsidizing the cost of keeping the financial system safe and sound. But most importantly, harmonizing the process internationally.