Amidst a challenging environment of slow growth, volatile markets and low commodity prices, financial institutions have turned their attention to cost-cutting exercises. Even the casual observer will notice that the discourse with stakeholders is peppered with terms such as “synergies” and “improvements in efficiencies”. Pay reductions and hiring freezes have rounded up the attempt to shore up sagging bottom lines.
Not all staff have been victims of cuts. Although many bankers have seen bonuses and salaries stagnate in best case scenarios, others have been shown the door. The axe has been selective though as one area has escaped these aggressive measures. Compliance has come out unscathed, thrived even. Its ranks has increased significantly as banks have engaged in a hiring spree to fill these positions.
Considering the general malaise permeating throughout the market, the numbers are quite impressive. The Financial Times reported that in 2013, HSBC increased its compliance head count by 3000, bringing the total to 5000 employees. Not to be outdone, JP Morgan in that same year spent an additional $1BN on controls and hired an extra 4000 compliance staff.
The rise in these professionals can be attributed to two factors. Banks have been at the center of financial scandals which have hurt the well manicured reputations and corporate images. The record fines that have accompanied the charges have also hit these institutions where it hurts the most, the pocket book.
A heavy regulatory burden is also to blame. The global economic crash of 2008 forced the hand of G20 governments. They reacted by enacting a slew of regulations to force greater stability within financial markets and, more importantly, prevent a reoccurrence. Appeasing public outcry certainly contributed as well. Whether it’s the onerous capital and liquidity requirements of Basel III, the stifling regulatory oversight imposed by Dodd-Frank, stringent new accounting standards or reporting and clearing obligations for over-the-counter derivatives, banks are under unprecedented scrutiny.
Unsurprisingly, the spending has led to a backlash. Bankers complain that their cost saving exercises are offset by heavy compliance spending. Investors and analysts are concerned with the potential of overspending on these new programmes along with the opaque approach banks have taken on detailing how money is being spent.
An offspring of fintech has presented a solution. The merger of regulation and technology, referred to as “regtech”, seeks to address the multiplying compliance obligations in a cost efficient manner. Though technology to address regulatory requirements is not a novel concept, the new batch of regtech offerings distinguish themselves in a few metrics identified by Deloitte. These include the speed at which reports can be prepared and integrated into solutions as well as analytics, the ability to scour large amounts of data and make sense of it. The latter is undoubtedly the greatest feature; as Deloitte puts it, “[…] data is meaningless unless it is organised in a way that enables people to understand it, analyse it and act upon it i.e. by creating consumable information.”
Numerous regtech solutions have sprung. Trustev markets itself to banks by offering to analyse transactions in real time to determine their fraudulent nature. Corlytics and Suade allow financial institutions to predict, understand and manage regulatory risk. Regulators are served as well by companies such as Vizor which offers supervision tools for entities they govern. Turning the attention in- house, Behavox and RedOwl Analytics monitor and prevent employee misconduct. AQMetrics provides compliance risk management tools to alternative investment fund managers while FundApps relies on a platform developed by global law firm Allen & Overy to facilitate shareholder disclosure reporting across numerous jurisdictions.
Government nurturing of regtech validates the potential of the technology. The UK’s Financial Conduct Authority (FCA) for instance has pledged its support. In a report from November 2015, the FCA outlined the steps it will take, specifically by (i) providing clarification on the steps regtech companies must take to comply with UK regulations, (ii) collaborating with such firms through partnerships with accelerators, academics and financial institutions, (iii) providing guidance to financial institutions with respect to the use of regtech products and (iv) addressing barriers to entry, innovation and adoption.
The momentum is promising. The technology presented by these firms will surely have a transformative impact not only on processes, but on costs and efficiencies. The beneficiaries will not be limited to the financial institutions as with greater data generated, regulators will have better tools to both understand and monitor markets.