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Jarred McGinnis, UK managing director at Ontotext, goes behind the headlines to find out what’s really going on with the newest trend in financial technology

Jarred McGinnis

Technology is often dominated by yearly trends, and financial technology is no different.  This year that trend seems to be ‘regtech’, or regulation technology. But what exactly do we mean when we talk about regulation technology, and what are the technologies driving this trend?

Anyone who works in finance is likely to have heard the complaint that financial regulation is becoming increasingly complex. The increasing quantity and complexity of financial regulation is proving a burden on many businesses. The inherent unpredictability in financial regulation – subject as it is to the whims of politicians guided by public opinion – creates challenges around understanding new legislation and implementing the requirements in a consistent way across business units.

Using technology to ease this burden is nothing new: technology has been used at various points in the regulatory enforcement process for decades. What is new is both the quantity of data being produced by financial firms, the amount of data required by regulators, and the analytical capabilities available for processing of this data to provide valuable and actionable insight. Together, these developments represent a significant opportunity for innovation in the financial regulation space, so much so that the Financial Conduct Authority (FCA) issued a call for input supporting the development and adoption of regtech in November 2015.

What can regtech actually do?

The FCA breaks down the potential solutions regtech offers into four areas:

  1. Creating more efficient ways of sharing information for reporting requirements
  2. Closing the gap between the intention of regulation and the interpretation of that regulation within firms
  3. Assisting firms in managing, exploiting and analysing their existing data sets
  4. Allowing regulation and compliance processes to be delivered in a fundamentally different way

It’s clear from this list that, at the moment, regtech is an area of great promise for a lot of areas, but is somewhat lacking in focus. Each of these points requires very different sets of technologies to achieve them effectively, and it’s worth having a clear understanding of what technologies we’re talking about before we get too excited.

What are these technologies? A brief survey:

One set of technologies that frequently makes headlines is biometrics. Banks and financial services providers are increasingly looking to investigate the capabilities of biometrics in reducing fraud and streamlining anti-money laundering (AML) checks, which at the moment are cumbersome. These added security mechanisms could mean in the future that a smaller amount of regulation is actually required to ensure security in complex transactions and prevent money laundering.

HSBC is planning a large-scale roll-out of voice recognition technology for the simpler purpose of securing account holders’ mobile banking applications. Such technologies will become more prevalent over time, and will form an integral part of security checking individuals.

The blockchain is another technology which holds huge promise for the future of regulation. The blockchain is a ‘distributed ledger’ technology – simply put, it enables exchanges of information and/or value between parties to be approved and publicly recorded without the necessity for a third party or central authority to verify them.

Put simply, blockchain technologies enable ‘disintermediation’, which cuts out the middle-man in transactions. This ability to disintermediate finance is generating substantial interest. By cutting out the middle-men who control information flows, blockchain could make financial services and general corporate governance more transparent and open to auditing.

Fraud investigation is an area that has been resistant to technology in the past, primarily because of the complexity of the problems each scenario generates. Even a case of low-level insurance fraud presents a complicated web of relationships and identities – who owns what policy, the event being claimed against, the interrelationships between claimants and third parties – that have been historically difficult to model via technological means.

However, a type of database called ‘graph databases’ is now at a level of maturity that they can be used in these scenarios. Rather than modelling data as a spreadsheet of rows and columns, graph databases model data as a ‘web’ of information, making it easier for a computer system to understand an environment rich in complex and overlapping ‘many-to-many’ relationships inherent in domains such as financial regulation.

Often one of the biggest barriers to effective regulation of financial services firms is simply a lack of understanding within the company as to what regulatory obligations actually exist in a given situation. This is hardly surprising: financial regulation is an extremely complex area, so much so that entire professions are devoted to creating and understanding it.

Semantic technologies, which enables machines to have an understanding of the keywords and key relationships within a body of text. At its simplest application. the technology makes written content indexable and searchable which enables tools for human experts to more quickly find and navigate regulatory data and content, which lowers costs and risks to an organisation.

Jarred McGinnis

Where do we go from here?

The key to regtech’s success will be its flexibility, and how easily these new technologies can integrate with existing systems. Banks are notoriously slow to innovate their IT systems from the ground up, preferring instead bolt-on technologies. This risk-averse attitude is understandable, however the result is that many financial services companies can be reliant on antiquated technology dating back to the 1960s. Deloitte estimates that in 2014 European banks spent €55 billion on IT, but of that only €9 billion was spent on new systems.

Companies describing their products as a ‘regtech’ solution will need to be mindful of this challenge, and demonstrate their knowledge of the existing technologies and issues in the field they are operating in. The key take away is that ‘regtech’ is not one technology addressing one problem: it is an umbrella term for a wide variety of technologies looking to solve the many regulatory and compliance issues that face the financial sector today.

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