What does the future hold for compliance and regulation?

Technology isn’t new to the regulatory agenda. But now we’re seeing that regulators not only expect to see financial institutions (FIs) using more tech, they’re also focussing their sights on tech that will help their own regulatory activities.

It’s no surprise then that our number one prediction for the future is an uptick in the use of technology, especially regulatory technology (RegTech) that uses artificial intelligence (AI), machine learning (ML), natural language processing (NLP) and more to make intelligent compliance decisions.

Over 2021, we expect an uptick in regulatory activity, driven by increased investment in AI from the regulators as well as a global shift in attitude from regulators as they expect – rather than encourage – firms to embrace AI.

We’re not just talking tech for the compliance team, this is technological change that touches every corner of the regulatory expanse: from regulators to challenger banks, to long-standing investment firms.

The messaging coming from the regulators has been tech positive for some time now. The Australian Securities and Investments Commission (ASIC), for instance, stated that it intends to focus on the use of “next-gen technologies” in its 2019-2023 Corporate Plan. Innovation and technology form a common thread throughout its Plan, which also says that its Office of Enforcement will oversee the use of emerging technologies to enhance its enforcement capabilities.

ASIC is not alone in its approach. The Monetary Authority of Singapore (MAS) has consistently been a pioneer in the development of new technology and has described it as a “force for good, to overcome challenges and improve lives”. We couldn’t agree more. In a 2019 speech, MAS Board Member, Ong Ye Kung, went further by saying “we encourage and expect our financial institutions to adopt new methods and technology.”

In the UK, the Financial Conduct Authority (FCA) has set out a two-sided approach to technology; it is investing in technology and data and expects FIs to do the same. In 2019, Andrew Bailey, then FCA Chief Executive, said in a podcast that the Regulator expected firms to be “future-proofing their technology”, adding that the FCA itself had some “heavy lifting to do” in terms of making investments in this area, specifically in data analytics.

2. Cross-industry collaboration

As firms and regulators look to implement and manage new technology, we know they will face new challenges. New challenges will require new approaches, joined-up ways of thinking, and increased collaboration to reach solutions.

Our second prediction? The future of finance is a collaborative one.

MAS’s Managing Director, Ravi Menon, has said that countries must “learn from one another’s experiences” if they are to succeed when grappling with new technologies. In his opening remarks at the BIS-World Bank Roundtable on the Impact of Technology on Financial Inclusion and Financial Stability, Menon commented that some countries, “notably India, Estonia and the Nordics, have created advanced industry-wide digital infrastructures.” Looking to the future, MAS intends to focus on information sharing “to meet our own country’s needs as well as to ensure seamless interoperability of these infrastructures across borders.”

Cryptocurrencies, for example, are a concept that many regulators are facing for the first time. It is a currency that is neither tangible nor limited to a jurisdiction. It rips up the rule book and is complex on a number of levels. The regulation of crypto, therefore, is going to need a global approach. ASIC has already set out a desire to see information sharing between international regulators to “clarify how cryptoassets should be or will be regulated.”

As well as cross-industry collaboration, we have seen a number of instances where firms and regulators are collaborating to explore, innovate, and implement new solutions. In the US, the Financial Industry Regulatory Authority (FINRA) has developed an Office for Financial Innovation, with the primary aim of being a support tool for member firms. The Office has been designed so that firms can tell FINRA what pressure points they are facing and work collaboratively to foster innovation. Other regulators will undoubtedly follow suit.

Historically, firms have been secretive about their compliance processes and the systems they have in place. More and more, however, we’re seeing firms open up and attending roundtable confessionals to discuss new tech and the benefits or problems they’re experiencing.

3. Human-machine symbiosis

We’ve all heard the rumours… eventually there will be no jobs left and it will all be done by computers.

We’ve heard this concern echoed across financial services, especially by those in compliance and regulatory change management. There are fears that the future of finance is a future where compliance officers are a thing of the past, replaced instead by artificial intelligence and smart technology.

This is not the future we envisage. We believe that the only way to create the perfect, watertight compliance system is to develop systems in which humans and technology work together in harmony, complementing and consolidating the work of the compliance team.

The industry is always going to need compliance professionals. As regulatory expectations develop financial services will, more than ever, need an experienced compliance team to make knowledge-based, human decisions – rooted in strategy rather than in administrative tasks. This will lead to a surge in new hires and enhanced training as businesses will need the workforce to build and implement new tools and make sense of the outcomes they produce.

We don’t doubt that the role of the compliance team will change, but it will not be replaced.

4. Climate change considerations

Climate change is something that, until recently, was seldom seen on the regulatory agenda. However, as it becomes a bigger social and political focal point it’s becoming a priority for financial services.

In the last few years, we’ve seen a seismic shift in investment priorities; more than ever before, investors are paying attention to where they put their money. Economic, Social and Governance (ESG) factors are becoming a key investment consideration. Individuals are starting to shy away from, for example, funds that contribute to deforestation or invest in unsustainable sources. This is especially true of millennial investors who are becoming more aware of the impact that their money can have on global affairs.

This makes total sense, of course. Climate change presents a number of risks that aren’t limited to those that threaten the environment. It poses physical risks to property and assets – which in-turn affects insurance claims and lower collateral value. Moreover, it opens up the possibility of devaluation as old assets such as fossil fuels lose their value, in turn reducing the value of associated loans and investments.

ESG, climate change and sustainable finance are topics already being considered by the FCA, who recently published a consultation outlining new proposals for climate-related disclosure requirements for listed companies. Under new rules, all commercial companies with a premium listing will be subject to the principal of ‘comply or explain’ – either they must make climate-related disclosures set out by the Taskforce on Climate-related Financial Disclosures (TCFD) or explain why they have not.

And while the FCA is ahead of many regulators in its approach, it still lags behind MAS, which introduced a similar ‘comply or explain’ rule in 2017. It described climate change as “the ultimate challenge for mankind” and has made a commitment to explore “interesting FinTech solutions” that will “spur green finance”.

5. Corporate culture from the inside-out

It’s no secret that financial regulators have traditionally adopted an outward-looking approach to culture, focussing chiefly on how firms treat their customers and meet the regulations surrounding this. But recent messaging suggests that regulators are adopting a new approach, one that looks at how firms interact internally as well as externally.

The idea is simple; firms are expected to meet their regulatory expectations, but if their culture suggests that staff are willing to flout the rules (workplace bullying, sexual harassment, etc.) then how is a regulator to trust that a firm is capable of meeting broader obligations?

This is an interesting move from financial regulators as they attempt to bring areas that may previously have been issues for HR under the compliance team’s remit. Essentially, they’re saying that compliance needs to go further than managing and meeting regulations, it should be about developing a culture which respects and obeys rules on every level.

Andrew Bailey summarised this point perfectly in a podcast last year, where he said that a firm’s culture “…can’t be divorced from how they run themselves internally.” This includes internal issues such as workplace discrimination or sexual harassment. He added that some firms may ask “…why is that relevant to the FCA given your statutory responsibilities are all about conduct towards customers?”. The answer, “… what you do inside your firm and how you behave will have an effect on our objectives. So please don’t think that we are prepared to ignore what goes on and moreover, that we expect management not to ignore it.”

The FCA is not the only regulator with an enhanced focus on culture. Australia’s financial regulators, ASIC, have issued similar messages, likely as a result of the 2019 Royal Commission Report, which unveiled industry-wide misconduct. ASIC Commissioner, Cathie Armour, has said that the Regulator’s aim is to “promote permanent cultural and behavioural changes in firms individually and across the financial services industry” and that it will be “adopting an enhanced and more strategic supervisory approach.” She added that, “supervision adds a focus beyond current known non-compliance by looking at factors that create significant risk of future breaches.”

It is likely that many of the predictions will lead to a swathe of regulatory change – from ‘comply or explain’ rules for ESG to new regulations surrounding developing technology. If our predictions are correct, compliance teams should begin preparations to ensure their existing systems and processes are effective and capable of managing regulatory changes at scale.

CUBE provides regulatory intelligence and regulatory change management that tracks and monitors regulatory changes and maps them to your existing compliance framework. Our AI-powered technology delivers regulatory insights that enable you to streamline and automate complex regulatory change management processes.

As the industry continues to evolve, regulatory change will occur at pace. CUBE can help you to properly prepare for and manage such changes – freeing up time and resources to focus on meeting these regulatory obligations.