Digital Regulatory Change – it’s magic!

On Monday 15th October at Barclays global HQ in London, we gathered together representatives from leading financial institutions and regulators to discuss the possibilities and promise of Digital Regulatory Change. This was the first in our series of international events held in collaboration with the FCA and focused on the topic of Digital Regulation. For the first time, in addition to an evening event which attracted close to 90 registered attendees, we held a closed door roundtable to explore the topic in more detail, with the objective of moving talk to action. This post summarises key themes and insights covered during both the roundtable and the event.

Digital Regulatory Change – is this utopian thinking?

Regulatory change is now an inevitable aspect of the financial services environment and we set out to explore why this is a problem and how digital technology can support and improve the plethora of manual processes used in the industry to manage this change. For our roundtable attendees, digital regulation is synonymous with straight through processing, automation and machine readable and / or executable regulatory rules. In this regulatory utopia, time would be saved and the process of interpretation would be more efficient, allowing people to focus more on strategic thinking or customers. Risk and cost would be reduced, efficiency would increase and better levels of compliance could be achieved.

However, there was also consensus that we are a long way from reaching this state of utopia and to understand why, we developed the framework below with the industry to explore  the challenges, obstacles and possible solutions for moving us towards the full digital management of regulatory change in greater detail.

Regulatory change management challenges – Horizon Scanning and Interpretation

Broadly, the problems associated with regulatory change are well understood, namely volume, variety and velocity. During the roundtable, we focused on some specific areas including Horizon Scanning and Interpretation. One of the key problems with Horizon Scanning, for example, is that it is still largely a manual process, with one attendee saying that ‘it takes up the first three hours of my day’. This is primarily due to the sheer volume of regulators and policy-makers that issue changes but problems also stem from the lack of consistency and alignment in rules across jurisdictions, the number of iterations one single change may have and the ability (and time) to assess applicability and assign priorities.

Another critical area is regulatory interpretation – understanding what the regulation means, how it applies to your specific business model to the level of detail that more detailed impact assessments can be performed and changes executed on time. Law is, by its nature, often ambiguous and regulatory rule-setters would state that this is often for good reasons. For financial firms, however, this ambiguity makes it very hard to quickly assess changes and thus meet tight regulatory deadlines. It is not just ambiguity that it problematic – inconsistency within and between different bodies of regulation is often an issue, resulting in the possibility of clashing compliance. Interpretation itself also happens at different levels – first, a generic or industry interpretation and then one that is specific to a bank’s business model, risk appetite and strategic ambitions. This iterative process adds further time and bureaucracy to an already manual process.

All is not lost – technology can help

Innovative technologies such as Artificial Intelligence (AI), Natural Language Processing (NLP), Optical Character Recognition (OCR) and Machine Learning (ML) suggest a path towards our regulatory utopia. Greater automation, disambiguation of regulatory rules, provision of audit trails and traceability from rules through to reporting, and the facilitation of on-line collaboration are all achievable using not just AI but APIs and cloud-based software-as-a-service tools. Implementing these technologies on an industrial scale would improve efficiency and dramatically accelerate the timeframe between issuance of a new rule and its execution. But….technology cannot address all the challenges associated with regulatory change and we must also recognise that there are significant obstacles in the way of technology adoption in this space.

What can’t technology do, and does this matter?

Some of the challenges associated with managing regulatory change stem not from the fact that it relates to regulation, but from the fact that it is change. Overcoming resistance to change is helped by having mandatory regulatory requirements, but several of our roundtable attendees commented that assigning accountability to business owners, and those business owners accepting this accountability was sometimes tricky. Such issues are unlikely to be solved by technology alone, and require human ingenuity, relationships and dialogue to overcome. Similarly, engaging and uniting stakeholders across an organization could be supported by technological tools but maintaining this unity through a complex and prolonged change programme is a purely human endeavour.

Anastasia Dokuchaeva from ClauseMatch

Magic = humans + technology

In her excellent keynote, Anastasia Dokuchaeva from ClauseMatch suggested that we perhaps do not need to look to technology to solve all our compliance-related problems. Instead, citing the example of ‘cyborg chess’, she said that

this magic combination of human and machine working together is a stronger force to be reckoned with

We can also use the very things that make us human to overcome some of the obstacles in the way of achieving our regulatory utopia.

Overcoming obstacles

During both the roundtable and the event, it became clear that while the financial services industry fully recognises the need to adopt digital technologies, there are also obstacles in the form of cost, the absence of a regulatory mandate and distrust of unproven technologies. Convincing boards and senior management of the need to spend money on technology to increase the efficiency of managing regulatory change is not easy – benefits are realised over a long time horizon in comparison to other investments that may more immediately impact the bottom line. Making the business case to adopt these types of technology without a firm regulatory mandate is difficult.

Liz Lumley, Steve Burman, Evgeny Likhoded

When it comes to trust, it is understandable that the use of an almost unproven technology solution requires a leap of faith. It is also understandable that few people within banks are willing to take such a leap. However, our event ended with a glimmer of hope for both industry practitioners and RegTechs alike when we heard about the partnership between Barclays and ClauseMatch. In an astonishing 7 months from the first meeting to the signing of the production contract in 2016, Barclays and ClauseMatch collaborated to create a truly global and centralised policy hub. When asked what had made this partnership work so well, Steve Burman (COO of Compliance, Barclays) said it was a primarily a matter of honesty and the ClauseMatch team being willing to go above and beyond to get stuff done. Similarly, Evgeny Likhoded, (CEO of ClauseMatch) said that the key to this project’s success was finding the person in Steve who championed their product and supported them to navigate the complexities of a large global.

Regulatory change is not going to stop so we must find more effective and efficient ways of managing it. We should all champion the cause of digital regulation internally – it will save money, reduce risk and ultimately improve compliance, making the financial system safer and sounder for everyone. If we do this and achieve the utopia that is digital regulatory change, that truly would be magic.

We will be continuing to explore the possibilities of humans and technology combined in our ongoing International Digital Regulation series. The next event is on 1st November in Zurich, so stay tuned for an update on Digital Regulatory Change in the Swiss context.

We would very much like to thank ClauseMatch, our partner for the event as well as Barclays for their generous hosting and of course, all our speakers, panellists and round table attendees without whom the event would not have been such a great success.