Regtech uses technologies that enhance efficiency and/or the effectiveness of risk management and regulatory compliance. These emerging technologies present opportunities to unlock significant benefits for Australian banks, regulators and the broader economy.
Today, a bank’s evolving business model, regulatory initiatives, and a challenging external environment continue to drive many Australian banks to explore the use of technology to enhance risk management and compliance. These motivations have led to technology becoming increasingly more powerful across both established and emerging areas, such as artificial intelligence, cloud and distributed ledgers. The traditional lens through which banks and regulators view compliance have begun to change, creating significant opportunities to leverage regtech solutions across a wide range of application areas.
Drivers of demand and supply for regtech
The Financial Stability Board (FSB) has highlighted the following drivers of demand for regtech solutions:
- Enhanced surveillance and compliance requirements.
- Increased complexity and volume of regulations, and the significant consequences of non-compliance.
- More efficient, effective and value-added regulatory data.
- More insightful policy and forward-looking supervision.
- Enhanced focus on cybersecurity and prevention of financial crime.
- Improved risk management capabilities.
- Larger number of supervised entities due to increased digitalisation.
This demand was also highlighted in our Major Australian Banks Half Year 2021 Results Analysis where close to 50 percent of all investment spend was on regulatory and compliance activities.
Facilitating this demand include the following supply levers:
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Integration of risk and financial data
To help meet demands and add value to the business, a key area financial services organisations in Australia are taking a closer look at is the integration of risk and finance data.
- Risk and finance data integration can deliver a much more consistent, and standardised view of the risk-adjusted returns banks are achieving throughout their business.
- Data transformation provides crucial insight into customer behaviours, enabling the development of better products and services.
- Exploiting these gains will make it possible to allocate capital much more efficiently.
- Integrated ways of working and a common infrastructure will improve control and eliminate duplication and efficiencies.
Realising these benefits will require investment in data and analytics tools that provide a rich new source of business intelligence and commercial advantage. But pursuing such investments piecemeal, within individual functions, does not make sense; instead, data transformation must be holistic.
The increasing regulatory demands for transparency further strengthen the case for integration. Australian banks need to meet more demanding reporting requirements and understand the implications of their reporting throughout the business. That way business leaders will have a much clearer understanding of the impact on capital/liquidity of their decisions. Policy priorities from APRA1 relating to Contingency Planning and Resolution as well as Stress Testing will only reinforce this need.
As the reporting regimes of finance and risk continue to converge, maintaining separate reporting structures may not be sustainable.
Integrating significant elements of risk and finance offers a springboard to the data transformation that leading banks now need to secure to take advantage of the opportunities regtech is providing. Organisations with ambition and scale of vision must now seize this opportunity with both hands, overcoming cultural barriers to embrace change.
The key is to focus on the benefits of transformation – more outstanding quality and granularity of data insight, accelerated insight creation, and improved efficiency – to create an enterprise-wide resource that can generate significant new value.
Financial crime
The threat and sophistication of financial crime continue to evolve and increase in society and businesses. Regulators and businesses recognise the importance of adopting regtech within the financial crime technology solution to combat and disrupt criminal activity effectively.
Software is an enabling tool that supports the detection and deterrence of financial crime. However, presently there are several case problems traditional technology cannot solve.
Technology solutions like AI, ML, blockchain and biometrics regtech enables financial institutions to address the myriad of complex challenges they face across the financial crime ecosystem. It works to resolve complexity, improve detection, reduce the high rate of false positives, and bring rich analytical insights to assist in unravelling networks and suspicious behaviour.
However, as with our balance sheet risk example, good quality and assured data is core to effective detection and deterrence. Several financial institutions (FIs) struggle to get a single view of a customer across the enterprise. Leading to problems across Know Your Customer (KYC), Enhanced Due Diligence (ECDD), Customer Due Diligence (CDD) and across the Anti-Money Laundering (AML)/ Counter-Terrorism Financing (CTF) monitoring spectrum. Many of the critical problems for FIs result from the inability to join up data, potentially leading to different risk scores throughout the organisation, thus making it challenging to leverage the benefits regtech solutions can provide.
Call to action for regtech
Regtech is already contributing to specific departments and is spreading its reach more broadly across financial institutions.
Emerging technologies promise to increase their value but can require access to large volumes of data. On both, the joining-up of systems and data within and across institutions will be vital in allowing regtech to achieve its full potential. We have seen globally where regtech is assisting institutions to improve compliance processes and thus reduce the potential for regulatory action and costly remediation activities.
There has also been significant re-architecting to leverage emerging technologies to improve the running of the business and generate cost savings and increased revenue opportunities. Whilst the Australian market is in the early stages of adoption we see significant potential to replicate these benefits.
Footnote
- APRA policy priorities: Interim update, APRA, 24 September 2021.
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