Covid-19 has made the already tough task of navigating compliance all the more challenging. But it's also been a boon for technology.
Forced to adapt to a new normal or close shop indefinitely, regulated firms have invested heavily in regtech over the past 12 months. To the point where 70% of firms overall — and 81% of systemically important ones — report having become reliant on it.
In our latest webinar Embracing New Technology, we sat down with ING's Ian Hollowbread, Google US's Sam Maule, and Thomson Reuters' Mike Cowan to discuss regtech's watershed moment and how regulated firms can make the most of their investment in technology in the coming years.
Here are the key takeaways.
A great leap forward
According to Thomson Reuters' Fintech, Regtech, and the Role of Compliance 2021 report, in March 2020 regtech achieved 10 years' worth of growth in three months. And this was down to three main reasons:
● Regulated firms wanted to make their processes more efficient
● They wanted to gain greater transparency over their decision-making
● And they wanted to cut costs
When it comes to hitting these goals, Mike Cowan — a senior regulatory intelligence expert at Thomson Reuters and one of the report's two authors — thinks the results have been encouraging:
'The report is very positive about things moving forward. 34% of those responding said regtech was actively affecting the management of compliance within their firms. So I think they're starting to realise real value...'
That said, Cowan notes, 'there are obvious challenges to overcome in the coming years.'
Ian Hollowbread — who has headed ING's RegTech Lab since 2019 — and Sam Maule, currently a key account executive at Google US, agree wholeheartedly.
'If I'm honest, I think it's a mixed bag,' says Hollowbread. 'There's absolutely been an acceleration in digital. But if we look at the core fundamentals of banking and finance and how much of that has really moved and progressed, I think there's a lot more to do.'
Similarly, Maule argues that 'digital... is 1% finished. And it's not a knock. I think that's a great statement... the opportunity there is massive... but it's still very early days when it comes to this.'
Beyond the hype
The Thomson Reuters report, which includes input from over 400 compliance professionals interviewed at the height of the first Covid-19 wave in March 2020, suggests that trust — or the lack of it — is a big reason why it'll be a while yet before regtech entrenches itself into regulated firms' systems.
'There appears to be a trust gap,' it notes, 'with firms as yet insufficiently confident to rely on regtech to inform their decision-making and strategic approach...'
Put simply, the tide may have turned decisively in favour of regtech. But now, regtech has to deliver the goods. Or, as the report puts it:
'Regtech will need to deliver reliable and repeatable results before firms and their risk and compliance functions will choose to use the outputs, for instance, to enhance strategic decision making.'
The other side of the coin, thinks Maule, is that 'we overhyped certain components, and undervalued others.'
'When we're engaging with new technologies," continues Hollowbread, 'we might think they can potentially solve everything. But the reality is that it takes a lot of hard work and effort. If you can't operationalise a technology to the extent that it needs... you won't get the results you were hoping for..."
Too much too soon
Unrealistic expectations aside, there's an infinite number of horror stories about tech going wrong or not delivering the expected results despite millions of dollars' worth of investment. To quote an often-repeated statistic, 80% of digital transformation projects either fail or fall short.
Recently, the UK's Financial Conduct Authority conducted its own research into this phenomenon. The ensuing report, Implementing Technology Change, published in February 2021, identifies four practical issues that make digital transformation more difficult than it has to be.
Unsurprisingly, legacy infrastructure and manual change management processes are high up on the list.
The report also notes that firms' digital transformation efforts can have knock-on effects on other firms. And that firms don't do nearly enough to track what others are doing and how it may affect them.
But the most significant danger lies in bringing about sweeping changes right out of the gate. 'Major changes', the report notes, are twice as likely to cause issues compared to small, incremental ones.
Plugging the skills gap
So, given the challenges regulated firms face, what's the best way to approach digital transformation, from a practical perspective?
According to Cowan, it starts by understanding that implementing new technology requires specialised skills.
Referring to the Thomson Reuters report, he notes that 'there's been a consistent level of awareness of the need to widen the skill set over the past few years.' But while firms have invested in specialist skills up to a point, Cowan thinks they 'maybe haven't kept pace.'
Hollowbread agrees. Luckily, he notes, there's a certain level of support that can be outsourced. And this is helpful not just for large firms, but even more so for smaller ones.
'The smaller you are,' says Maule, 'the more you're reliant on service providers. If it's hard to hire a data scientist or AI specialist from Oxford or Stanford as a Wall Street firm, it's even harder if you're a community bank in Oklahoma.'
But it's not just a question of plugging skills gaps.
'There's also a big shift needed in culture,' continues Hollowbread. 'I think a lot of the industry wants to change and sees where the future is going. But actually doing it in reality is a different story.'
Looking ahead: unlocking success through good governance
It's safe to say we're in the middle of a regtech boom. And this is good news for everyone. In an increasingly complex, interconnected landscape, effective and efficient compliance benefits regulated firms, regulators, and customers equally.
That said, it's early days.
We're only scratching the surface of what firms can achieve by using regtech. And while there's been huge progress in terms of adoption and implementation, the challenges inherent in digital transformation won't magically go away.
So what can firms do moving forward?
The FCA has identified a number of practices that, together, boost the chances of making digital transformation a success.
Successful firms, it notes, dedicate as much as 75% of their IT budget to digital transformation and embed risk management into the day-to-day running of change projects.
More to the point, though, they avoid large-scale change, going for smaller, more frequent releases instead. And they have strong governance arrangements in place.
'If there's one takeaway,' says Cowan, 'it's the need to implement new applications in a controlled way, being mindful of good governance. Firms need to be careful to deploy solutions on solid foundations. And this means getting your corporate governance right.'
To succeed, concludes Hollowbread, you need to be able to work at speed. 'The better the governance, the better the processes in play and, hopefully, the quicker adoption is. Everyone wins.'
Want to learn more about how the regtech boom could impact compliance moving forward?
Watch the full webinar Embracing New Technology.