BIS about RegTech and Suptech: digital transformation is no longer just “nice to have”

All opinions expressed in the publication are solely mine and not the institution I am associated with.

Few weeks ago, I wrote an article about barriers and impediments for a rapid development of RegTech solutions (available in Polish). One of the most ‘notable’ challenges that negatively ‘contribute’ to the faster digital transformation of (automated) regulatory compliance is lack of parallel solutions made by supervisors and regulators (SupTech) that could be linked to RegTech. Such collaboration could support institutions to effectively fulfil their obligations and supervisors to better understand ‘what is going on’ in institutions’ balance sheets and organization. Just three days ago Beno?t C?uré – Head of the Bank for International Settlements Innovation Hub gave a speech about ‘Leveraging technology to support supervision: challenges and collaborative solutions’ where he called for more intensive use of technology to support financial institutions and banks. 

I don’t want to elaborate on fundamentals (definitions) of RegTech and SupTech. Both are technologies and solutions that facilitate burdensome and time-consuming work (or processes) with regulations, reporting and data analysis. This work is mainly, even today, done manually or semi-manually and in fact - generates avoidable expenses (time), is prone to human errors and is not too ‘friendly’ for end-users. Technologies such as machine learning (with Big Data) and artificial intelligence (rarely) could contribute to better data and better reporting and in turn – better supervision and risk management. 

If you have time, don’t forget that European Banking Authority has recently started its survey about the future of RegTech and SupTech. You can contribute here. In addition, EBA has its own plans that were revealed in recent response to the consultations for Digital Finance Strategy that is ‘under construction’ by the Commission. Plans are ambitious as it might entail some kind of supervision over RegTech providers. 

Benefits?

Beno?t C?uré marked that such technologies

‘(…) can enhance diligence and vigilance in risk monitoring and management in real time, improving the resilience and stability of the broader financial system’

From financial institutions perspective – don’t forget about cost of regulatory compliance that is done manually. You have to engage not only compliance, risk management or finance units but also business that usually have necessary data. Maybe I am too optimistic, but I think that new automated solutions could save more than 20% of current compliance cost (and more in a long term). 

If we talk about RegTech and SupTech we usually refer to reporting obligations and risk management, but it is something more

. It could cover other obligations that are ‘tied’ to business units and significantly support change management that is more and more challenging in our difficult times (check link for information on communication that European Banking Authority ‘created’ as a response to the Covid-19 crisis). It could also enhance fraud detection and lower operational costs. 

We should not forget about another benefit. As we go into more automated and secure solutions the risk of human-error and/or third-party manipulation will be significantly lower. 

This is not an easy task

Indeed. To create an effective and friendly environment for RegTech and SupTech we need engagement of all stakeholders, i.a. financial institutions, tech providers, regulators, policymakers and supervisors. One of the most crucial and currently important point is ‘openness’. Openness that could only work if we have Application Programming Interfaces that enable to ‘grab’ necessary data and exchange information between parties. Of course, having such ‘open channel’ between supervisor and financial institution is not enough, as we need also good data analytics (advanced natural language processing is vital!) on both sides. It could be, however, a nice kick-off. 

This bring us closer to the real-time supervision that could be much more effective (early supervisory actions taken right in time before ‘big problem’) and cheaper in a long term. Such supervision should, however, be somehow limited by effective and proper legislation to avoid any bias.

The biggest challenge here is of course technology itself. Not only cost of implementation since we have cloud-based solutions (other issues here are, however, regulatory constraints) but rather lack of expertise (industry versus supervisor) and potential difficulties in ‘(…) grasp[ing] how outputs and decisions generated by AI and machine learning tools have been formulated and can be explained. Lack of full transparency (black box problem) of supervisory actions taken based on automatic data-feed could be widely questioned and result in court proceedings. Therefore, implementing such solutions should be based on a good plan with proper resources. 

Digital transformation requires a certain degree of uncertainty, experimentation, and a “fail fast” mindset

This is a quote from Beno?t C?uré speech and is extremely important when we talk about digital transformation (not only of supervisory authorities). As we have entered a new era of digitalization and new tools are emerging, we should change the way we think (both supervisors and institutions – or more precisely – people within organisations). If we want to move forward, we have to accept that errors and mistakes will occur as a consequence of our actions. 

Supervisors should accept fact that transformation (e.g. collaboration with non-banking fintechs) may affect balance sheets and do not meet all regulatory expectations

. This should not automatically result in regulatory action, rather applying a ‘fail-explain-comply’ mechanism that should bring better results. In addition, Beno?t C?uré said that ‘trusted collaboration between regulatory authorities, financial institutions and external technology experts, may, therefore, be necessary to foster effective regtech and suptech adoption and overcome (…) challenges. 

How? 

We have many ways to do it. Hackatons are the one way to attract experts and build interesting solutions for supervisors (Polish Financial Supervision Authority already do it – see here) that could be linked to some ‘academy’ programs. Creating a regulatory sandbox is another example of leveraging new technologies. Machine-readable regulations could also help as natural language processing is always a power-consuming process.  

EBA has proposed three scenarios for RegTech environment in various terms: 

1.     Promoting the development of an industry sponsored RegTech platform; 

2.     Certification of RegTech products, services and process and 

3.     Oversight of RegTech services providers. 

We have many options. First thing that is important here is to start and spread the word. We talk a lot about digitalization in RegTech and SupTech areas, however, progress is not yet that visible. We should engage stakeholders and try to kick-off with new initiatives. Only then we will be able to change the environment we live in.