The Head of the Bank for International Settlements (BIS) Innovation Hub, Benoît Cœuré, has endorsed RegTech as “indispensable” in modern-day regulatory efforts, noting that technology adoption is a “silver lining” to the Covid-19 pandemic.
In his speech, Leveraging technology to support supervision: challenges and collaborative solutions, Cœuré, took time to reflect on the current regulatory landscape. More than ever before governments, banks, businesses and financial institutions (FIs) have had to re-evaluate the way they work. The corporate environment has been altered, with technology now “front and centre”. With this renewed, unavoidable focus on technology comes a new wave of collaboration across industries, regulators, businesses and even borders. The pandemic, remarks Cœuré, has “accelerated trends in digital innovation that were already underway.”
Technology is now indispensable to businesses who want to thrive in the ‘new normal’, and the BIS recognises that the benefits presented by RegTech and SupTech for both regulators and regulated entities are “enormous”.
Moving away from manual
“Artificial intelligence and machine learning, data visualisation tools and other technologies could help financial institutions conduct better monitoring and report suspicious activities in a more timely and accurate manner.”
For many years, data management workflows have been “heavily manual”. Storage has been fragmented across spreadsheets or desktops, Cœuré remarks, “data analysis is performed in relatively simplified spreadsheet models, and visualisations are contained in static reports that require manual updating.”
Regulators and FIs have started to make progress in eliminating what Cœuré calls “manual inefficiencies”, however, while automating existing processes is an improvement, “it isn’t transformational.”
Instead, Cœuré invites us to imagine a world where processes go beyond simple automation: “Data architecture is built with technology stacks that support data of higher granularity, diversity and frequency than could be accommodated previously. Data loading and consolidation are fully automated using, for instance, application programming interfaces (APIs).” Add to that the introduction of artificial intelligence enabled tools, natural language processing, machine learning. While it may sound idealistic, Cœuré notes that “this is not science fiction” in fact, “this technology is available today.”
Not only is the technology available, it is transformational. If adopted, supervisory and compliance teams would have more time to spend on pre-emptive supervisory actions “before any potential problems start to materialise”.
Barriers to adoption
Despite the clear benefits of RegTech and SupTech, Cœuré recognises that many supervisors and FIs continue to hold back in embracing new technology.
The speech notes that a 2019 survey by the Cambridge Centre for Alternative Finance (CCAF) and the World Bank found that regulatory innovation initiatives are still relatively rare. In fact, it found that RegTech and SupTech programmes were the least common among regulatory initiatives, with only 14% of surveyed regulators implementing them.
In an attempt to understand why, Cœuré identifies three prominent challenges:
- Technology. While AI advances decision making processes, it remains relatively opaque in terms of processes. The BIS acknowledges that it can be difficult for human users at FIs and regulators to understand how AI decisions are made and the complex processing that lies behind them. Lack of transparency means boards do not understand enough to make positive or educated steps or decisions, and so may avoid it altogether.
- Talent pool and resources. Even once FIs and regulators commit to embracing RegTech, they may find that talent and resources are hard to obtain. Demand for those who are able to understand and program technology far outweighs the supply. Moreover, regulators will find it more difficult to attract talent than those they regulate, due to fewer resources.
- Uncertainty. The digital transformation of financial regulation and compliance requires a level of “uncertainty, experimentation and a ‘fail fast’ mindset”. These are not elements that sit naturally within the comfort zones of financial institutions or prudent regulators.
“Trusted collaboration between regulatory authorities, financial institutions and external technology experts may, therefore, be necessary to foster effective RegTech and SupTech adoption and overcome these challenges.”
Collaboration is key
The BIS notes that digital innovation is borderless – it is not confined to one jurisdiction. The BIS’ Innovation Hub is therefore aiming to focus on “international collaboration” in order to build on the effects of numerous central banks that have already made significant advances in terms of innovation.
With that in mind, the Hub is collaborating with the Saudi G20 Presidency to host the first ever global, virtual TechSprint. This will mark the first time that a virtual, global hackathon of this scale is held for RegTech development. The Hub hopes that the event will provide an opportunity for RegTech and SupTech solutions to be developed that can subsequently be deployed globally. If successful, this collaborative approach will see innovation that address common regulatory pain points and challenges, and will avoid traditional, siloed approaches.
For some time now, CUBE has been acutely aware of the challenges presented by outdated legacy and manual processes – and the benefits that transformational, AI-led technology could bring. It is refreshing, therefore, to see an international financial institution such as the BIS echoing our messaging. Of course, RegTech does carry with it an element of the unknown, but the barriers to adoption, as listed by Cœuré, are as much attributable to mindset as they are to risk. Uncertainty and lack of understanding or knowledge are hurdles that can easily be overcome. Initiatives such as the BIS’s virtual TechSprint will hopefully move towards breaking down barriers to adoption and creating a new, tech-positive approach among FIs.