At the highly successful second annual RegTech Summit in New York on the 15th November, a selection of senior industry leaders came together in the first session to discuss the hard questions facing the industry. Where is innovation coming from? What barriers are preventing the adoption of RegTech? What are the best ways to minimise risk on solutions that are not yet fully proven? What skills and talents are need to drive the industry forward – and what are the key success factors in making new collaborations work?
Moderated by A-Team Group’s Chief Content Officer Andrew Delaney, the panel brought together Abel Picardi, Managing Director of Compliance at Bank of China; Travis Skelly, SVP of Ventures Investing at Citi Ventures; Roxanna Wall, Executive Director of Group Risk Control – Strategic Development at UBS; and Nikhil Aggarwal, Director at Promontory Financial Group (an IBM company).
One of the key topics of discussion centred around innovation and disruption – and the panel were vocal about the exciting new developments taking place, especially in the financial crime, anti-money laundering (AML) and artificial intelligence space.
“When you think about regtech as a whole, the human aspect is still really important; and now we are able to use a number of different analytics techniques to help us generate augmented intelligence,” noted Picardi. “We are able to help investigators through robotic process augmentation to gather together different pieces of the puzzle to help them achieve a much more robust and efficient investigation.”
Blockchain was another focus point, especially as it applies to identity. “This is really a game-changer,” emphasised Picardi. “We are shifting to dynamic risk ratings, and moving from KYC (Know Your Customer) to KYT (Know Your Transaction).”
“It is really about the customer owning their own digital identity, that package of information about themselves that they can then permission the banks to access,” added Wall. “There have been many attempts to create KYC solutions by aggregating data across banks and trying to assess where there may be risky issues, and that inevitably fails. There is definitely some innovative work happening on how to create that identity on the blockchain, permission it, and use some of the advanced encryption technologies to allow for some of this data sharing. There is a lot of interesting work going on in this area, but we are still quite far out.”
Another key area of innovation our industry leaders highlighted was the rapid developments in electronic and voice communications surveillance (e-comms), as banks become more digitised, their interactions with clients become more digitised and their volumes of data keep increasing. “It is becoming virtually impossible to staff enough people to listen to hours of recordings to identify potential issues in terms of insider trading and so on,” warned Wall. “So there is an urgent need to take advantage of some of these new technologies available and start to build those out in terms of machine learning, AI etc to really handle these waves of data that are coming in. There will be a lot of innovation coming out of that as we start examining these big data sets to identify potential patterns.”
Wherever the innovation is coming from however, our panellists agreed that collaboration was both the main barrier and the most important goal.
“It is a challenge on both sides,” explained Skelly. “There is new technology coming in, and then the banks are trying to react – and the banks would love to be excited by and implement these new technologies immediately, but it is very hard to do so. The main challenge comes when you try to integrate these exciting new solutions with the wider company.”
Difficulties can also arise when attempting to replace rules-based systems with machine learning technologies, or when replacing manual processes with automation. “That gets very controversial quickly because it is replacing jobs, which causes concern,” warned Skelly. “The easiest way to solve some of the issues with regulatory audits is to just throw more people at the problem. Until regulators get comfortable with automation, I don’t see that changing.”
Legacy systems are another challenge. How can banks make the new solutions fit in with their existing systems, and how much money will it cost them? “One of the big challenges with regtech solutions is that on the surface, it doesn’t actually help to drive revenues and drive the business forward – so there is a reluctance to put money towards something that doesn’t create money,” noted Wall. “And a lot of these solutions are adopted in the compliance and risk space – but the culture of these organisations is risk averse, so unless something is ready to plug and play, there is often a reluctance to invest.”
Equally, compliance and risk organisations are often under tremendous cost pressure, generating competing priorities. “We are constantly faced with the question of how you resource things when there are limited resources,” agreed Wall. “How do you overcome that? It’s about being persistent and always trying to show where there is a broader benefit more than just the cost savings. It is about looking at how you can partner internally and team up with other functions to reallocate funds. In terms of adoption, you need a clear understanding of what your requirements are and how that matches to what is available in the marketplace.
So how can firms collaborate to solve some of the common challenges we face as an industry?
“Collaboration is key, but you have to start with the basics. That includes the financial institutions, the regtech providers and the regulators,” explained Picardi. “It is the financial institutions that have to drive progress. If you are a regtech vendor looking at the financial institution to meet its needs, how do you know what the activities of that bank are? How do you know what they do? There has to be a collaboration between the institution and the regtech provider, and unfortunately right now that can take a long time. In our bank it can take about three months to get a vendor on board, for example.”
Competition is another issue – the marketplace is getting crowded and from the sales side vendors must be ready and willing to work with the institutions to meet their specific requirements.
“Is the regtech provider willing to work with you?” asked Aggarwal. “Are they willing to do a proof of concept? Are they willing to adjust their solutions? Are they willing to co-create? Can their technology be embedded, will it fit into our operating model? After we move beyond a PoC, will it be scalable? How will it perform during a live action run? Is it explainable? AI explainabiity (XAI) is crucial – regulators are trying to move away from black box solutions now so it is important that when a provider comes in, they can take you through the logic and explain it right down to the 14th decimal place. And in terms of assessing a firm, you have to do thorough due diligence. What is the bench strength of the team? Do they have the right balance of understanding technology and commercials? Who are the investors? Who have they been working with? SupTech (supervisory technology) is a growing area, for example- if a provider has feedback from regulatory supervisors, that gives us a lot of reassurance.”
In conclusion, the panel agreed that collaboration was the most important issue facing the industry today.
“Why do we need regtech? Because if you look at all the requirements, you could fill this room with the paperwork that is required and the rules that you need to comply with,” concluded Picardi. “The challenge is getting consensus – from all levels.”