ASIC plays in RegTech sandbox

James Riley
Editorial Director

The Australian and Securities and Investment Commission has turned its attention to the burgeoning regulatory technology sector, raising the possibility that its innovation hub and regulatory sandbox could be extended to startups working in this area.

ASIC held its first RegTech round table in Sydney and Melbourne this week to explore how technology can be applied to help companies meet their compliance and regulatory requirements.

ASIC Commissioner John Price said that ASIC’s Innovation Hub had already engaged with 30 RegTech companies, that the field was evolving rapidly and had the potential to both save companies time and money as well as to support agencies with their regulatory roles.

Julia Walker: The cost of compliance is going one way – up

Attendees were told that the compliance burden in the financial sector alone was now so onerous that the four major banks spend around $300 million each on compliance initiatives every year.

And the regulatory challenge continues to rise. Thomson Reuters’ head of market development for risk in Asia, Julia Walker, said that for all organisations: “The cost of compliance is going one way – in 2016 there was an average of 200 regulatory alerts,” facing enterprises.

She said that six technologies held great promise for organisations seeking to streamline compliance and reduce risk – namely blockchain, cognitive computing, the Internet of Things, open source and APIs, the cloud and big data.

Each of these areas is being explored by both RegTech startups and seasoned technology giants such as IBM which are applying technology to regulatory challenges.

However Ms Walker acknowledged that RegTech could be highly disruptive, referencing the recent Davos World Economic Forum which in January was told that as many as 50,000 finance sector compliance jobs were under threat from RegTech solutions.

Although RegTech is on the rise, it remains dwarfed by fintech.

KPMG’s co-lead of global fintech Ian Pollari said that there were around 600 fintech businesses in Australia, compared to about 30 RegTechs, which were also receiving less funding than their fintech siblings.

Part of the challenge according to the RegTech startups that attended the roundtable is the inertia in large corporates, and the speed at which regulators are prepared to accept RegTech solutions.

Simple KYC co-founder and CEO Eric Frost said he had presented to large financial organisations and found himself competing with internal projects. Simple KYC has developed a solution intended to help organisations covered under the ‘know your customer’ provisions of the Anti-Money Laundering/Counter Terrorism Financing legislation.

“Decision making in bureaucracies is a huge challenge around the time to decision and information security. We have had people spent nine months doing a review.” Mr Frost said that sort of slow progress was a “huge barrier” for startups.

It may also reflect the fact that the banks are taking more of a DIY approach to RegTech, running their own distributed ledger, API and big data initiatives, for example.

According to Mr Pollari, this is certainly the case with the Wall Street banks. He said that 50 per cent of the patents registered by US banks in the last 12 months were in the RegTech area.

Delegates also felt that there was a reluctance to buy into RegTech solutions that had not received a clear stamp of approval from the regulators themselves.

Henry Davis York lawyer Vinod Kumar warned that could prove a long wait. “Getting ASIC to sign off on a platform? I can’t fathom that – that’s where lawyers come to play.”

He also noted that Australian principle based legislation and regulation could be difficult to reduce to a binary technology solution, which some led to attendees at the round table calling for regulators to move to more machine readable regulation, which was not ambiguous or open to interpretation.

Tyro executive director Jost Stollman said that RegTech provided an opportunity for a rethink about regulation and compliance, so that it was seen not as a hindrance but as an enabler of good business.

“Imagine a world where the regulator achieves openness and transparency in the financial services industry and people look after compliance themselves.”

He argued for a; “Cultural revolution when compliance moves from policing to doing the right thing.”

That however will require a new class of information system able to deliver genuine operational clarity according to Blackhall & Pearl managing partner, Harry Toukalas.

He said organisations felt that they were “drowning in information, but starving for insights.”

He said Blackhall & Pearl has been working with MIT’s innovation lab on AI solutions that explore employee conduct and attempt to identify and stamp out rogue behavior which he said could be the hardest element of regulatory compliance.

“Will AI be able to monitor, yes, analyse, perhaps, predict and shape human behavior? That’s the real challenge,” he said.

Wrapping up the session – which attracted about 100 people, including bankers, lawyers and technologists – ASIC commissioner John Price said the key challenge for regulators when thinking about fintech and RegTech was that “Consumers want a flawless experience, but they want to be safe.”

He said that there were risks associated with RegTech particularly around cyber security, and that some organisations might adopt RegTech as a tick-and-click expediency rather than a genuine compliance and risk reduction exercise.

Nevertheless he said that he felt RegTech offered an “Opportunity to move from a rear view mirror to a learning and predictive approach – to change the role (of regulators) from policeman to coach.  I think that’s very powerful.”

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