RegTech is turning Crucial for Compliance for Financial Services

Manish Bharucha, CEO, Kyzer Software

The Fintech sector is evolving and innovating at a rapid pace especially post the pandemic and will continue to do in the post-COVID era as well. Over the past years, there has also been a significant regulatory push to incorporate automation across financial Services alongwith the usage of digital channels such as AI, Machine Learning / Robotics concepts to support automation. This has prompted the regulators to apply individual accountability to financial institutions.

There have also been continuous updates to the existing regulatory framework to include the ethical use of AI. The regulators globally realized that such delivery techniques are going to become BAU services and have prompted a focused review of the fairness, accountability, and transparency principles. The cloud services market has been identified as a concentration risk within the sector, published reports on Cloud guidelines for outsourced service providers and the regulators have updated their guidance papers.

Roadblocks faced by regulatory reporting for financial institutions

The process of regulatory reporting for financial institutions indeed faces various challenges. The one topping the list is insufficient governance. A robust governance framework plays a major role in regulatory reporting and ongoing compliance. Its components include culture, behaviors, policy and procedures, systems, control, and assurance. The final output is regulatory reporting but the journey to achieve this goal can indeed be cumbersome.

The next major hurdle is poor integration of the technology ecosystem. The fact of the matter is that many financial institutions are typically faced with multiple different systems that do not interact with one another. Extracting data, amalgamating and consolidating it from core systems whose primary purpose is not to support regulatory reporting is tough. These systems are designed for operational purposes. However, the data contained within them is required in some way, shape, or form to satisfy regulatory reporting requirements. But what financial institutions have to go through is that the financial control processes are usually done manually. As the volume of work grows, more manual intervention is required and hence regulation seems to be a burden.

The third biggest hurdle that surpasses all others is data. In the present times, it has become imperative for financial institutions to be able to demonstrate that they truly know and understand their data. This implies that they need to have transparency of data, good governance, and comprehensive audit trails.

The operational risk associated with end-user automation is another noteworthy challenge that financial institutions have to face. When the process is automated, control regimes will and do facilitate not just regulatory reporting but also ongoing regulatory compliance. The thought of automation can conjure up the notion of full-blown, lengthy IT projects requiring robust infrastructure, which in turn can restrict financial institutions off the idea of automation or slow down the transition process from manual to automation.

Tracking can be yet another challenging job when there are thousands upon thousands of transactions happening and lines of data floating.

The lack of a strong regulatory relationship can further add to the woes for financial institutions. The rules and regulations themselves are never clean-cut and at times can be contradictory, as well as being open to interpretation not just by financial institutions, but by consultants and auditors alike. It is this lack of clarity that often adds to the cost of compliance, as financial institutions need to call on subject matter experts (SMEs) to help with the interpretation and application of regulations.

RegTech solutions: A blessing in disguise

In such an ever-evolving landscape full of challenges, RegTech platforms step in as a blessing in disguise that helps deliver solutions that are vital for meeting regulatory expectations. These services range from sustainable enhancements in financial data accuracy and processing control to ensuring operational efficiency and regulatory reporting.

The fully automated solution reduces the time taken to complete reconciliations and enables the development of an integrated risk and control framework. These platforms are low investment solutions facilitating scalability of operations at reduced costs. They also possess the capacity to enhance and scale existing processes and synchronize them with regulatory requirements. They enable improved communications by providing a real-time interface for both financial institutions as well as the customers. They offer configurable dashboards that allow oversight teams to monitor KPIs, breaks, and workflows as well. RegTech solutions also enable interaction with multiple core, non-core systems as well as data sources as per the requirement along with ensuring operational efficiencies.

Therefore, there is now not just a real need, but an actual desire by firms to automate their reporting regimes. RegTech firms are an ideal solution for them not just to help them tread on the path of digitization but also to resolve the various challenges faced while regulatory reporting. This requirement is not only fuelled by the complexity and speed of change of regulations, but also by the increased interrogation from external auditors as well as regulators.

Innovative reporting solutions now provide the ability to manage data using case and workflow management tools. Automatic escalation of breaks and exceptions provides the ability to have a chance of identifying and capturing issues before they become breaches. This typically includes automatic labelling and analysis of breaks, and RAG statuses to reflect financial institutions risk ratings and SLA (Service Level Agreement).

Summing Up!

RegTech platforms enable easily adaptability to incremental changes due to new regulations, new data sources, and ongoing process refinements. They also allow full operational control to map changes to data points and fully recordable and auditable workflows. They provide insightful and automated report generation and data extracts, alongwith outbound scheduled communication using email and messaging.

Financial institutions will be in a much stronger position if they have a fully documented pragmatic application of a new or a change to regulation, rather than dismissing it as not applicable without due consideration and governance. This will ensure efficient interaction with the regulators as they gradually shift attention and perhaps enforcement on the compliance function.This is the reason why RegTech is becoming a vital element for compliance for financial services.

Views expressed in this article are the personal opinion of Manish Bharucha, CEO, Kyzer Software.

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