Financial services firms have lobbied hard to roll back regulatory burdens and have found a sympathetic ear in the Trump administration – but they may be backing the wrong horse according to VigilantCS founder and CEO Rob Kirwin, in a research interview with FinTech Global.
Kirwin told FinTech Global, firms have complained incessantly about the escalating costs of compliance in the wake of new regulations. But the former regulator and chief compliance officer believes a robust global regulatory regime is here to stay. If there is one area that will come under greater scrutiny, it is that of advisory practice—the ability and willingness of advisors to deliver fair client outcomes, otherwise known as conduct risk. The horse that they should be backing is technology, specifically Regtech.
RegTech, which encompasses artificial intelligence and machine learning, can detect and flag patterns in human behaviour that enable firms to take preventive action, improving outcomes for clients. These new technologies inspired Kirwin to launch Toronto-based VigilantCS, a cloud-based staff-level compliance platform. The company helps dealers, advisors and investment fund managers gain access to cost-effective improved controls and analytics to lower conduct risk.
The platform includes regulatory disclosure management, staff personal trading tracking, social media reporting, client complaint reporting, as well as proficiency and continuing education requirements. In short, it tracks whether financial services employees know what to do—competency—and their behaviour as it relates to client accountability.
Kirwin said, “Compliance officers are a little bit fearful of RegTech. Since the credit crisis, they have found comfort in ramping up staff numbers and expanding their oversight.”
“Now, with new technology, you’re going to find that those manual spreadsheets and other manual controls can be automated, and disparate systems that track staff activity but do not speak to each other are insufficient to provide a profile view of each staff member. There will be resistance from some compliance professionals to Regtech, but in the end technology will support compliance professionals and firms achieve better outcomes.”
This rise in the need for RegTech is seen in data from FinTech Global, with Q1 2017 setting a record for the number of investments in RegTech companies at 34 deals completed in the period, up from 25 deals in the previous quarter. Deal value was not as high as in Q3 2016, which was $76m more across 11 fewer deals. RegTech’s potential is being realised as new companies emerge and investment dollars are drawn into this area.
Kirwin sees the opportunity to reallocate compliance staff that are now dedicated to collecting and organizing data to data analytics—gaining a better insight into staff conduct to mitigate conduct risk. RegTech platforms allow compliance officers to spend less time working with lengthy manual tasks and more time on productive one.
He added, “I think that, ultimately, the role of the chief compliance officer or the compliance manager is going to change from merely tactical to a strategic role. Compliance can play a critical role in the organisation, and with better quality data that is more accessible, it will allow compliance to partner with the business in order to drive it forward in a compliant manner.”
Over time, financial services firms large and small will have to adopt RegTech solutions to increase efficiency, enhance controls and lower costs. This might not be too far in the future with new regulations being implemented all the time and banks wanting to save money.
Kirwin added, “Here in Canada, financial services company margins are getting thinner, so the banks are beginning to automate areas that consume resources. By the same token, banks are very concerned about reputational risk. So, I would say within six months to a year there’s going to be significant growth in RegTech investment and then it’ll just keep growing.”
One of the issues that Kirwin has noticed is people not seeing or understanding that there is a problem that needs to be fixed. That means a lot of his time is spent teaching people how to identify the problems, how efficiencies and better data can help a business understand itself better, and the payoff of RegTech. When a company gets new data, compliance tends to simply put it on a spreadsheet, which in the end costs millions in ongoing manual updates, but the cost is not quantified.
“I don’t think there will be a choice. It’s going to be one of those situations where some firms will adopt RegTech quicker than others, and those firms will have improved margins and a better understanding of their business. It’s going to be one of those situations where the early adopters who can demonstrate value will cause a bit of a ripple effect throughout the industry.”
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