This article was written by Mark Holmes, CEO of Waymark Tech.
When it comes to regulation packages, there’s always a scramble to get over the finishing line. This leads to compliance officers living for months or even years in a constant state of urgency. But why does implementation almost always end this way? And why can you always count on the problems being discovered late in day, rather than earlier on in the process?
Few things cause all the problems
The usual answer is that banks don’t have enough detail to put the regulations into practice in a way that they are confident will satisfy the regulators. But in my view the problem is actually far simpler: we can’t identify the specific pain points in the legislation fast enough.
In the 514,000 words that comprise MiFID II and its guidance, there might only be three or four of these pain points that cause 80 per cent of the problems in implementation. For example, over recent months, a good proportion of ink has been spilled about research budgets – a single article in a massive piece of legislation.
These pain points aren’t only about clarity either. They may also result from how legislation overlaps or pulls in a different direction to other existing regulations on our statute books.
For example, MiFID II Article 16(6) and Article 16(7) require financial institutions to keep records of all client interactions and provide regulators with quick access to client data to ensure compliance; while GDPR Article 32(1)(a) requires the introduction of new safeguards and encryption procedures to make sure client data is always kept securely.
Clearly, this conflict poses a problem for compliance managers, and one which they must answer before they can start implementing MiFID II. If they don’t answer this question, they might end up having to rewrite or roll back very quickly at a later date – and risk being noncompliant for this period.
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Identifying these pain points ahead of time
The truth is that it’s almost impossible to predict which parts of the legislation will become major pain points until the industry starts actually trying to implement the legislation. You don’t know there’s a problem until it emerges. This is further complicated by the fact that legislation is also getting longer. The longer the regulations, the more difficult it is for people to identify specific pain points.
Given the length of the legislation, regulators also have to spend a lot of their time writing reams of secondary guidance. The recent Financial Conduct Authority guidance paper on MiFID II is 156 pages in length, which just goes to show how big a task implementation really is for industry, individual officers and the regulators.
If it was possible for the regulators to identify the specific pain points ahead of time, they could focus their energies on writing guidance on this topic first – which would stop the delays later in the implementation cycle.
Regtech is a viable two-way solution
There is no silver bullet for difficult problems like this. Implementing new financial regulations almost always end up in a blame game. Banks blame the regulators for a lack of clarity. The regulators blame the banks for not starting the process early enough.
But there are two ways that regtech can help. First, regtech can provide a digital environment for regulators, banks, and third parties to come together much earlier in the process to discuss implementation. Informal, real-time discussions would help everyone involved identify pain points early.
Formal consultations play an important role in this process. But in the age of the internet, it is now possible to have quick, informal discussions. You can imagine an online platform where regulators, banks, lawyers, and third parties are able to annotate primary legislation in real-time with questions, answers, or comments. This type of platform could be used to dramatically speed up the process of identifying pain points through collaboration. It is something that Waymark is working on right now.
Secondly, the latest AI also makes it possible for computers to digest legislation, and intelligently predict where the pain points will be right at the outset. This might not be perfect, but it will at least point regulators and financial institutions in the right direction.
AI can do this by ‘reading’ the primary legislation and flagging up the sections and paragraphs that it doesn’t understand, plus highlighting potential overlaps and conflicts with other pieces of legislation incredibly quickly. This is similar to a type of tool that Waymark recently launched for a number of pilot clients. Think how useful this would be for regulators as well as firms. They could predict problems well ahead of time, and focus their energy of giving guidance there first.
Regtech has the potential to connect together the industry and regulators, inject clarity and speed, and share the burden of this avalanche of new regulations. If we work together we can finally lay to rest the problems surrounding implementation and stop the blame game forever.