Digital Regulation Essentials Series: The Impact of Expanding Regulatory Initiatives

In the first of a three-part blog series, we will discuss how the expanding impact of legislative initiatives on both financial institutions and regulatory bodies are creating new requirements for a more integrated data strategy.

The new era of digital regulation is here. Despite a decade-long trend of expanding and increasingly complex regulatory requirements, the data integration capabilities of regulators and institutions remain surprisingly unprepared for the demands of these new policies. It’s not just the pace or volume of change, these new rules will demand an unprecedented breadth of data access to activity, process and function.

The emerging regulatory environment is challenging regulatory bodies as much as financial institutions. The traditional “respond to the regulator’s request with a snapshot” model will soon be unsustainable for both agencies and firms that still rely on overly manual compliance processes and rigid legacy systems. This could be especially problematic for ill-equipped buy-side financial firms that have historically delegated regulatory compliance to the sell-side.

Not only will there simply be too much regulatory activity for the current paradigm, regulators will increasingly focus on audit trails to determine not just what took place, but how it transpired. How we address compliance must also evolve. The new era will bid farewell to a reactive, project-based approach that relied on siloed data.

To keep pace, agencies and firms are uniting to seek a data-driven alternative—one that allows for automation and the same 360-degree view of the data from both sides of the table. As the future of compliance arrives, firms and the agencies regulating them will rely on data integration to meet the challenge of digital regulation.

The discussion is just starting around digital regulation and the automation of governance and oversight. If governance could adapt to new regulations automatically, compliance would not take as much effort and risk as it frequently does today.”

Giles Nelson, CTO, Financial Services at MarkLogic

More New Rules, Different Yet Similar

Even after a decade of increasing oversight, a recent JWG report titled Ready for Digital Regulation? found that this trend will continue. There will be 374 new legislative initiatives targeted at financial firms by 2021. Though the JWG analysis of 50,000 documents pointed to new policies predominantly originating in North America or Europe, unavoidable requirements will come from other regions, countries and even individual states in the US .

It is critical to understand that this challenge is existential, in terms of both cost and resource, for everyone involved. With so many new rules and changes to existing policies, humans alone will not be able to keep pace with reading the requirements, let alone be responsive to them.

The diverse governing bodies produce layers of different-yet-similar rules, requiring high volumes of reports with each requiring slightly different views of the data. This puts the focus on how. Regulators increasingly want to know how actions are taken or decisions reached. Firms must discover how to provide transparency that will unburden compliance teams from costly, back-breaking reactive measures.

Globally, regulators are embracing and furthering RegTech initiatives. For example, the UK’s Financial Conduct Authority (FCA) is prioritizing data innovation even as it grapples with uncertainty about its place in the EU. Recently, the FCA fined Standard Chartered £102 million for being in breach of transaction reporting and anti-money laundering (AML) rules. Goldman Sachs was also fined by the FCA for AML violations to the tune of £34 million, providing evidence that even the largest institutions are struggling to overcome cumbersome compliance processes and address regulations that are constantly changing.

With agencies embracing digital regulation, the cost and resources required to remain in compliance becomes unsustainable in the near term.

The Increasing Cost of Compliance

JWG found that, since 2009, the cost of compliance has persistently increased. On average, firms are now spending 4 percent of their revenue on compliance. That figure is expected to reach 10 percent by 2022.

These costs go beyond dollars and cents. In the first year of MiFID II alone, 1,335 inaccurate transaction reports were submitted to the FCA . This figure represents roughly one quarter of the MiFID II affected UK firms, indicating a widespread struggle to comply with rules not yet being aggressively enforced.

Based on BIS reporting, firms appear to be trying to implement technology solutions to meet regulatory needs, but with marginal progress at best. The reason most often cited for slow progress: Obstacles created largely by the complexity and interdependence of technology improvement projects. This translates into struggles with accessing high volumes of siloed and unstructured data using systems not built to do so.

Even in this rapidly changing environment, firms should step back and consider how to address current and upcoming compliance challenges. Breaking free from reliance on legacy infrastructure, they can instead focus on an enterprise-wide strategy for achieving 360-degree views of data—placing emphasis on the integration of internal and external data.

Understanding the Impact of New Rules

Data integration enables transparency, and this will be required to meet the breadth and depth of challenges associated with sustaining compliance now and in the future. To address the needs of regulators from anywhere and everywhere, you will want a more holistic view of your data—bringing the big picture into focus and making even the tiniest scrap of data immediately accessible.

Countless changes, often ad hoc or incremental, move us into a new age of digital regulation. For example, trading algorithms went largely unchecked prior to MiFID II, but now firms must identify and control each unique trading algorithm. This now requires a persistent view of each algorithm’s code, testing and behavior.

These new rules create new data governance and reporting requirements across all business functions: from customer onboarding, trading and communications, to storage and use of personal data. All data relating to trades, traders, clients and counterparties must be available, organized and accessible in real time to meet current and future obligations.

Digital Regulatory Reporting Requirements as a Catalyst

To make digital regulation a reality, both financial organizations and regulatory agencies must come together to develop the models and interfaces for exchanging data and information. Conceptually, digital regulatory reporting will enable the straight-through processing of information between entities through the application of model-driven, machine-executable regulatory reporting. Although there are still many hurdles to making digital regulatory reporting a reality, as regulators in the UK are discovering, the wheels of change are already in motion.

In part two of this blog series, we will discuss digital regulatory reporting in more detail and what this means for your digital regulation data strategy.