“The Future of Financial Regulation: Machine to Machine”

By Nikhil Sengupta, UK banking and regulation specialist, Five Degrees

The rise of big tech: setting new expectations

The fundamentals of what businesses and individuals perceive as banking have evolved from a traditional high street model to a complex ecosystem of financial and technology providers – all working in collaboration with one another.

The emergence of technology companies has provided access to a greater diversity of products and services – highly customisable and delivered at speed to the end-user. These technology companies, some with banking experience and those with no previous track record, have altered the way in which customers now expect services.

Indeed, our research conducted by Censuswide of 2,000 UK banking customers shows that 4 in 10 Brits (43 per cent) expect to be able to set up their bank account instantly. However, under half of traditional and challenger banks are only provisioning for an instant set up.

Instant customer expectations are a challenge but also an opportunity for traditional banks. Across the world, banks and financial institutions are attempting to align with these new customer demands by innovating new products and services to stay ahead of their competitors.

Navigating regulatory challenges: ensuring regulation keeps up with the speed of innovation

Digital technologies are accelerating the time it takes financial institutions to launch products and services to the market. However, before banks jump straight into innovating, it’s essential that they remain compliant and there is a growing need in the industry for regulation to keep up with the speed of innovation.

Gone are the days where self-regulation was enough to keep things on an even keel, with many traditional banks still reeling from the crisis of almost a decade ago. Navigating regulatory challenges requires a robust digital-first strategy, operational and infrastructure change, a clear focus on assessing and managing risks, and meticulous execution.

Currently, manual regulatory processes are not enough to align with the speed of product development. For compliance to be ensured, organisations must deploy technologies to oversee the technology which is being created. The future of regulation is machine-to-machine.

Harnessing RegTech to stay compliant

Companies are already starting to deploy machine learning, AI, and NLP to enhance risk management and compliance processes. Machine learning is helping to improve traditional control testing activities, while AI can enhance the effectiveness of monitoring and surveillance tools to identify potential breaches in policy or market abuse. NLP can also help with the supervision of  political, economic and market activity; spotting signs of trouble ahead.

However, existing legacy systems within traditional banks and financial institutions are prohibiting the roll out of new regulatory technologies, also known as RegTech. Banks may spend months innovating new products and services only to find out that they are not compliant at the end of the process – wasting time and money. Machines operate on rules and algorithms but when combined with manual processes the result is fragmented data and siloed activity that can reduce the effectiveness of remaining compliant.

For banks to survive, they must champion a switch to digital: the digitisation of their IT architecture to enable them to integrate the necessary regulatory solutions. Banks can then innovate in the peace of mind that their products and solutions will be compliant and ready for launch to market.

If in doubt, ask for help

At the same time, as a way of supporting the navigation of regulatory challenges for banks and FinTechs in the UK, the FCA has created an ‘Innovation Hub:’ a regulatory framework to assist with the authorisation of new and existing ventures. By using the FCA ‘Innovation Hub,’ companies can achieve authorisation, supporting them with applications for authorisation or a variation of permission.

In addition, the FCA is also helping banking and finance entrepreneurs mitigate regulatory issues with its UK ‘sandbox:’ a controlled, safe environment where entrepreneurs can test out new innovations.

The FCA investigates the technology behind companies and helps them trial their solutions to customers. The ‘sandbox’ is reducing the time it takes for entrepreneurs to get their business to market and innovators are able to attract customers while testing.  Alongside this, the FCA is helping firms to roll out cross border solutions to enable them to scale their companies effectively.

It’s clear that for banks to keep ahead of customer demand they must innovate to survive, but at the same time they must take a belt and braces approach to stay compliant.  Banks and financial institutions must fully digitise their processes to deploy the necessary RegTech seamlessly into their systems, while proactively involving the support of regulatory authorities, such as the FCA, to navigate and prepare for regulatory challenges.

About Nikhil Sengupta: Nikihl Sengupta is UK banking specialist at Five Degrees London office, a fast-growing digital banking technology provider headquartered in The Netherlands, with offices in London, Iceland, Portugal and Serbia.

Previously, Nikhil was at Ohpen responsible for business development and sales, following on from a position as the Head of UK Compliance where he helped build out the compliance function and achieved authorisation by the FCA.

Prior to this, Nikhil started his career at the Financial Conduct Authority (FCA) as Lead Supervisor assessing emerging and current conduct risks amongst Asset Managers. During his time at the FCA, Nikhil participated in an industry placement at JP Morgan working closely with its management team responsible for asset management, and the navigation of regulatory challenges.

Nikhil holds a first-class honours degree in Economics from the University of York.

Author: Yash Hirani

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