In brief
- A major challenge for heads of compliance is coping with rapid regulatory changes amid skill shortages and budget constraints, further complicated by increasing regulatory enforcements.
- A lack of collaboration among banks hinders the adoption of best practices, leading to redundant efforts and inefficiencies.
- RegTech (Regulatory Technology) solutions offer innovative ways to handle complex compliance challenges. Adopting these as-a-Service streamlines complexities and frees internal teams, enabling better agility, scalability, and risk management.
Luxoft’s Global Head of Trading and Risk Solutions, Ihyeeddine Elfeki, explores how organizations can stay on top of ever-increasing regulatory demands.
What’s the number one challenge faced by heads of compliance in the capital markets sector today?
Perfect storm
The primary issue is the accelerating pace of regulatory changes, which leaves less time for implementation and a shortage of the right skills. The impact of this is compounded by budget constraints and the increased number of regulatory enforcements (64,000+ alerts annually in 2021), resulting in a difficult landscape for regulatory managers.
Starting from scratch
The current approach to addressing compliance requirements leads to every bank having its own separate design and execution team to handle their specific needs. This lack of collaboration among banks is a missed opportunity, as it hinders an organization's ability to benefit from the experience and best practices of other institutions. As a result, each organization must start its regulatory journey from scratch, undergoing the time-consuming and costly process of exploration, experimentation, and error correction.
We see the same questions and technical challenges raised again and again by financial institutions across the globe. To name a few:
- Regulatory reporting, where there is a need to deal with higher volumes of data and perform more complex calculations
- Risk analytics, dealing with a fragmented application framework consisting of legacy systems on different technologies and databases
- Anti-money laundering and know your customer, which require more automation as manual work does not allow scalability and is a source of errors
- Fraud, dealing with more sophisticated patterns and increased volume of losses. The volume of data produced by the financial industry today is massive, and leveraging this data to extract customer insights and prevent fraud requires analysis beyond the ability of any single team
- Trade surveillance, which deals with more regulatory audits, increasing the amounts of fines and reputational exposure
The advent of RegTech
In the face of these increasingly complex challenges, banks need to adopt a proactive and innovative approach to compliance. And the solutions lie in technology and delivery frameworks.
The speed and level of technological change presents a challenge to our traditional approach to technology and outsourcing. New, emerging technologies have begun to outpace legacy systems, and have proved themselves to be efficient in handling complex regulatory processes.
Specifically, a new subset of fintech solutions, known as RegTech, looks to address regulatory processes. A complete RegTech solution looks to address four main areas:
- Data architecture
- Business workflow
- Data visualization
- Connectivity
How does RegTech work?
An effective RegTech solution harnesses the power of advanced technologies and integrates them seamlessly. These include, but are not limited to:
- Big data — provides faster analysis and monitoring of large amounts of data
- AI / ML — develops risk models and improves how the enforcement and monitoring of regulation is targeted. AI is used to automate data processing and is increasingly being used to implement know-your-customer (KYC) solutions
- Robotic Process Automation (RPA) — automates operations
- Open APIs — allow the development of new capabilities such as technologies like sensors to collect data at a scale previously unfeasible, or biometrics as a way for banks to verify customer identity and fight money laundering
- Cloud computing — provides solutions for banks to enable and accelerate complex calculations
What are the issues with RegTech?
RegTech solutions have proved to be successful in enhancing risk management, reducing human errors and improving effectiveness. So, what’s the downside?
The price of RegTech’s success is that literally thousands of solutions have hit the market, posing a challenge for financial institutions to navigate this increasingly complex ecosystem.
Banks need to not only select the appropriate RegTech solutions for their needs, but understand the cost structure, the underlying technologies, the required skills, and work out how it fits together with their existing platforms.
And with over 2,000 different RegTech solutions available in 2023, this can pose a confusing and time-consuming challenge — but a common one that all banks are facing when dealing with technology in general. As technology ecosystems become more complex, it gives rise to a sophisticated level of inter-dependencies, plus a need to maintain, upgrade and manage interfaces and general performance. This takes time and budget from in-house teams, leaving less breathing space for innovation such as building new business features.
The solution? As-a-Service
When technology is consumed as-a-Service, it frees up an organization’s internal teams from dealing with these complex interdependencies and everyday maintenance issues.
In exchange for a monthly subscription fee to use services deployed on the cloud, a bank’s complex technology ecosystem is fully managed and maintained by the service provider.
As well as the saving in time and budget, freeing up important resources to focus on more revenue-generating activities, it also offers more agility and control. It opens up the possibility to scale up or scale down services as market conditions and business priorities demand.
In fact, Trading Systems as-a-Service provides banks with the opportunity to scale more rapidly than ever in response to market forces. And with inbuilt evergreening, there’s no need to worry about keeping up to date with the current software version. Everything from applications to the operating system, database and cloud infrastructure is fully hosted, managed and maintained.
The future of RegTech
RegTech infrastructure in particular can be incredibly complex. The aim of as-a-Service is to simplify and connect the entire ecosystem. With coverage of data services, trading compliance, risk analytics, risk calculations, reporting and more, you get true visibility into your exposure. And as this is done on one unified platform, you have access to a comprehensive enterprise risk and compliance coverage.
The ideal here is to deal with one service provider who presents and unifies a complete ecosystem covering every facet of RegTech, instead of trying to piece together its different components separately.
The as-a-Service provider can also — by having access to multiple banks, geographies and regulations — provide a proactive and accelerated approach to addressing regulatory requirements by:
- Continuously monitoring regulatory updates, building extensive regulatory experience to project-manage regulatory changes and ensure that all bases are covered when it comes to compliance
- Continuously monitoring the RegTech solutions ecosystem, partnering with them and working jointly on skills, capacity-building and integrability with other RegTech solutions or key legacy platforms deployed at banks
- Mutualizing the investments needed to address specific regulatory requirements by packaging the required work and deploying it with a reduced cost and accelerated time
For banks, this means a better corporate experience by maximizing cost efficiency whilst ensuring that regulators, customers and employees are satisfied.
The importance of internal functions
However, although as-a-Service has the potential to revolutionize the way we approach regulatory requirements from a technology standpoint, none of this negates the importance of the organization’s in-house staff.
It’s crucial that existing teams remain aware of the importance of compliance and legal requirements — which may not be a revenue-generating function, but nonetheless are a central component to managing risk and executing successful business strategies.
Ready to find out more? Contact Luxoft today to learn more about as-a-Service.
For related content, check out our blog post ‘How to deliver post-trade digitalization’
Ihyeeddine Elfeki
Ihyeeddine has 20 years’ international experience delivering technology and business solutions to Capital Markets and Financial Services, with proven success and a track record of delivering optimal results in high-growth environments through initiatives that exceed operational performance targets and yield measurable outcomes.
In 2016, he joined Luxoft’s London office to lead the Trading and Risk Solutions practice, first in EMEA and then globally. He has led several deals with banks, asset managers, treasury and commodity businesses, playing a key role in guiding their transformation journeys.
