How global standards could transform regulation
Financial regulation is needed within every area of the market. However, these regulations change based on the geographical location you’re in. This makes international deals and trading complicated as regulations can massively vary. CUBE CEO and Founder, Ben Richmond, speaks to The FinTech Times to consider the emerging need for a global regulatory standard.
Worth hundreds of billions of pounds, the financial services sector is estimated to account for up to 25 per cent of the global economy. The fact that there is no one set of rules that govern the industry is a serious concern, and the costs are high.
Generally, somewhere between 10 and 15 per cent of a financial institution’s operating costs are wrapped up in regulatory compliance. Big banks are slapped with expensive fines on a monthly, sometimes even weekly basis. Tens of billions of pounds – in addition to countless working hours – are lost to paying these penalties; a cost that could be avoided if the right checks and measures were in place.
However, there is an opportunity for the UK to lead in bringing together the RegTech industry, by proposing a set of clear, global standards for financial compliance.
Drowning in regulation
At present, the system is complex and disconnected. Last year, more than 300 million pages of financial services regulation were produced, and disseminated via a confusing mix of different methods and media. It may have been created at national, state, or even municipal level, for example, and the information distributed via emails, website announcements, newsletter subscriptions, or through the issuing of physical documents.
Because there’s no global standard on how regulation is produced and shared, its volume and availability is impossibly immense. To expect a financial services institution that operates in multiple jurisdictions to keep up and comply with all the change is, frankly, unrealistic.
The financial services landscape has changed too. It started with the financial crisis and spurred on by covid-19. Financial services operate online more than ever before, however the regulatory framework remains almost untouched. Yes, the regulations now exist in a digital format, but as financial services transcend borders and jurisdictions, financial regulation remains constrained by geographic boundaries.
This is especially true of the current emerging trends for finance. Banks and regulators are currently racing against the clock to manage emerging risks posed by sustainability, cryptocurrencies and cybersecurity in particular. Regulators are attempting to develop new regulations and set parameters. The irony of it all, however, is that while climate-change related risks, cryptocurrency and cyber all transcend borders, they will inevitably be brought into the same, nationalistic regulatory system.
The only means of managing these emerging risks on a global scale is coordinated, regulatory standards across the regulatory landscape, with unity around how regulations are produced, consumed, and applied across the financial services industry.
Global standards are a way off. But, fortunately, an opportunity exists for significant simplification of the way in which regulatory information is produced and consumed.
Standardization and automation
The solution lies in an open, standards-based approach. One that’s driven by technology and data rather than by policy or law-making.
Automating this approach is also essential. Manually sifting through thousands of documents to determine what’s relevant for compliance is not only laborious, time-consuming, and an error-prone task but, regulations can change in an instant. Even after implementing a particular process, firms can quickly find they’re back at square one.
So, in addition to using standardized data models, schemas, and data interoperability to simplify the complexity; it’s important to introduce automation by starting to use machines rather than people, as we’ve done to date. Open and interoperable, this system should be available to the whole industry, enabling simplicity through standardization.
This should begin with the creation of a market standard, to which a few big banks and regulators would opt in. From here a common model can be built with which every player in the industry can work. Then, as it grows, the approach will use technology to create consistent data models and data exchange formats to drive the adoption of a standards-based approach around the world.
Collaboration between financial institutions and RegTechs is key. After all, every institution faces the same challenges when it comes to regulation – spending time and money on what is typically a duplication of work, while consistently inconsistent results. Rather than going it alone, it makes sense for these companies to work together – taking a collaborative approach toward understanding and navigating the complex work of financial regulation.
This is where the opportunity lies. The UK’s RegTech industry is leading the world, and the country would well and truly lay down its marker down as the world’s RegTech capital if it were to pool its intellectual capital, and propose the world’s first global financial standard. And, what is more, it would constitute an important step towards a more financially compliant and safer financial system.
This piece was originally published in The FinTech Times.