UBS spent close to $1bn in order to meet regulatory requirements, while JPMorgan spent a similar amount only on controls while hiring an additional 4,000 compliance professionals in 2013 alone. HSBC employs over 7,000 staff in its compliance department. The management consultancy Bain&Co recently estimated that “governance, risk and compliance (GRC) costs account for 15% to 20% of the total “run the bank” cost base of most major banks”. Just some of the mind-blowing numbers that support the claim that the cost of compliance is one of the key reasons why business has become so difficult. But there is a new buzzword that promises relief: RegTech. Short for regulatory technology it aims to help dealing with regulatory requirements, but the question is whether it can live up to the expectations.
We talked to Jochen Heussner, RegTech expert and founder of PlanetCompliance about the hype surrounding RegTech, their latest publication of the ultimate guide to the industry plus how Hedge Funds and other financial institutions can save millions and refocus on their business.
HedgeThink: Is Trump going to save the financial industry from the regulatory tsunami by rolling back some of the laws brought in by his predecessors?
Jochen Heussner (laughs): I don’t think so. Regardless of what you think of him and the impact he may have, I think it’s doubtful he will be able to completely undo regulatory acts like the Dodd-Frank act. And even he did, we would only be speaking about one jurisdiction, and it wouldn’t affect the numerous regulations that have been brought in in the last couple of years here in Europe, for example.
HedgeThink: Is there no end then to this and will we simply have to endure wave after wave of new regulations?
Jochen Heussner: I don’t think that’s the case either. Firstly, we may actually see some light at the end of the tunnel with big initiatives like MiFID II, which will become applicable in January next year. Though this will not mark the end of discussions and is likely to drag on for a while, but it might slow down like many industry believe. This is also supported by diminishing numbers of new compliance hires, which is due to the fact of the saturation of that part of the job market on one hand and the rise of RegTech on the other.
HedgeThink: You mention RegTech, could you explain a little further what that stands for and what it means in practical terms?
Jochen Heussner: RegTech stems from Regulatory Technology, which in itself is nothing new. Like in other parts of the financial industry we have been using technology for many years. The reason it has become the latest buzzword a lot of people rightly talk about is that thanks to the use of innovations like artificial intelligence we see applications that deal with regulatory obligations at a whole new level. For example, these solutions can better record and make data available; monitor, report and analyse the large amounts of data financial institutions have; alert in real-time in case of risk scenarios or fraud, for instance; and reassess and refine processes based on machine learning to further improve the solutions over time.
HedgeThink: Why is RegTech such a big deal for financial institutions right now?
Jochen Heussner: Everyone in the financial industry from large international banks to hedge funds to niche service providers is aching under the weight of regulations. Since the financial crisis of 2007-2008 lawmakers have introduced an unprecedented number of new regulations around the globe, the legal acts on MiFID 2 from the institutions of the EU are easily in the double digits and that is just one regulatory initiative. We’re at a point where the sheer volume of regulations and the associated cost of doing business make it impossible to continue as it was. Instead financial institutions of all sizes need to find partners that help them automate Compliance processes & controls and make them more efficient and cost-effective.
HedgeThink: So is it all about cost saving then?
Jochen Heussner: Not at all. Cost saving is an important aspect of RegTech as it is simply not feasible to have armies of compliance professional going over spread sheets and conduct checks manually, to give an example. It is also not possible to control the massive amounts of data with traditional solutions. Innovative solutions can scan multiple sources from e-mail to chat to voice recordings, help different systems to interact and integrate the data that was until now lost between the different departments of a bank, and detect what is relevant and what not. In doing so, it also reduces the large amount of false positives and makes the whole business more efficient, allowing financial institutions to focus on their core activities.
HedgeThink: You’re the founder of PlanetCompliance and you’ve recently published the RegTech Directory. What is that all about?
Jochen Heussner: The PlanetCompliance RegTech Directory is basically the guide to the industry. It combines insights and analysis on the RegTech industry and is the most comprehensive directory of RegTech firms and their solutions. A little bit like a Buyer’s Guide if you will. It also explains the different areas of RegTech solutions like monitoring, reporting, due diligence and Know-you-customer, Legal and Regulatory Analysis, or even Training in an attempt to make those annual sessions fun through gamification, for example.
HedgeThink: So what’s you’re advice for financial institutions in respect of RegTech?
Jochen Heussner: Regardless how big your institution is, RegTech may be able to save you some serious money while at the same time improve your processes. That is true if you’re an international challenger bank, a boutique asset manager or a FinTech start-up. So, when you’re considering how to deal with your regulatory obligations, think about how these could be done through RegTech automation, acquaint yourself with the topic and speak to some of the people in the industry to get a better idea. And hopefully the RegTech Directory can help with that.
Jochen Heussner is an industry veteran, having worked for many years in legal and compliance roles in the financial services industry. He is the Founder of PlanetCompliance.com, the platform for news, analysis and insights from renowned thought leaders on regulation and disruptive innovation in the financial industry. You can download the PlanetCompliance RegTech Directory here for free.