W4: FINM4100 Regtech: Redefining Compliance

W4: FINM4100
Regtech:
Redefining Compliance
Part 1
Examine the digital revolution taking effect across
regulation and compliance.
FINM4100 Roadmap
Week 1
Introduction
Week 2
Analytics &
Accounting
Week 3
Fintech
Week 4
Regtech 1
Week 5
Regtech 2
Week 6
Presentation
Q&A
Week 7
Economic
Modeling
Week 8
Data Analytics
Workshop 1
Week 9
Data Analytics
Workshop 2
Week 10
Data Analytics
Workshop 3
Week 11
Data Analytics
Workshop 4
Week 12
Presentation
Q&A
Lesson Learning Outcomes

Recap of the previous week…
• What are financial services? What is financial advice?
• Financial services in the aftermath of the Royal Commission. What has
been the fallout?
• Fintech – the crossroad between financial services and digital
technology. What is it?
• Fintech examples. Which services have you dealt with?
– Cashless payment systems and infrastructure
– Open banking and neobanks (digital banks)
– Adviser and broker tools in financial advise provision
– Superannuation
• What is the role of Big Data in Fintech?
The winds of change…
“I have a dream. It is futuristic, but
realistic. It involves a Star Trek chair and
a bank of monitors. It would involve
tracking the global flow of funds in close
to real time (from a Star Trek chair using
a bank of monitors), in much the same
way as happens with global weather
systems and global internet traffic. Its
centerpiece would be a global map of
financial flows, charting spill-overs and
correlations.”
Andy Haldane, Chief Economist,
Bank of England (2014)
Innovation Snapshot
Innovation Snapshot
Disruptive innovation
What do these have in common?
‘disruptive innovation’ – while not new – is defined as a process whereby a
smaller company (usually a start-up/new entrant) with fewer resources is
able to successfully challenge established incumbent businesses.
– Bower and Christensen’s (1995)
Publishing Passenger Accommodation
Trivago
• Accommodation aggregator – aggregates deals offered by online travel
sites (like Expedia, Hotels.com and Amoma) and then highlights one
price
• Trivago gave consumers the incorrect impression that highlighted
deals were the best price they could get
• FACT: “Trivago based its rankings on the highest cost per click it
would receive from its advertisers” – ACCC Chair Rod Sims
The Cost of Compliance
• Grew from $16 million to $30.9 million (2011-2017).
• Discussion: Why have the cost of compliance increased?
Compliance Cost Drivers
A few key reasons for the rise in compliance costs.
1. The Digital Demand
• Digital services create more input and output points for financial institutions to
manage.
2. Heightened Regulations
• Regulators under increasing pressure from public to undertake enforcement and
prosecute wrongdoing
3. Coping Mechanisms
• Many organisations lack sufficient internal capabilities (no human capital) to
build compliance systems so need to outsource (more costly).
The Regulators
A number of regulatory ‘watchdogs’ oversee compliance in financial services.
Australian Securities and Investment Commission (ASIC)
Regulate Australian companies, financial markets, financial services organisations
and professionals who deal and advise in investments, superannuation, insurance,
deposit taking and credit.
Australian Prudential Regulatory Authority (APRA)
Supervises institutions across banking, insurance and superannuation. Tasked with
protecting the interests of depositors, policyholders and super fund members.
Australian Competition and Consumer Commission (ACCC)
Maintain and promote competition and remedy market failure. Protect the
interests and safety of consumers and support fair trading in markets.
Activity 1
Q1: Look at Athena Home Loans and their mortgage refinance platform.
Briefly discuss the product and the company’s business model.
Q2: Identify ways in which the above company, and/or their product(s), could
potentially mislead consumers.
Q3: Who are the market regulators and what do they do? What is the purpose
of regulating financial services?
Q4: What are the main reasons behind escalating compliance costs?
Q5: In what ways is technology changing regulation and compliance?
What is Regtech?
Compliance Systems &
Governance Frameworks
Digital Systems &
Information Architecture
Regtech
What is Regtech?
Regulatory technology (regtech) to help organisations ease the burdens of
compliance.
Technological tools designed to help businesses meet compliance objectives – strict
timelines and complex, time-consuming audit KPIs.
Regtech is designed to streamline compliance efforts and to reduce the reliance on
humans for regulatory work.
technology
Financial
markets and
institutions
Economic
shocks
threatens reinforces
What is Regtech?
• Regulatory changes since the GFC (2008) have focused on stress testing
banks’ balance sheets
– BASAL Accord
– Focus on ADIs
• Contemporary regulation much more customer centric
– End user privacy and data protection (Cambridge Analytica)
– Digital footprint
• Financial Services Industry
– Royal Commission 2018: conflicts of interest
– Future regulation will be around the collection and use of data in a manner that
is fit for purpose.
What is Regtech?
Regulatory changes since the GFC
(2008) have focused on stress
testing banks’ balance sheets
➢ BASAL Accord
➢ Focus on ADIs
Financial Services Industry
➢ Royal Commission 2018:
conflicts of interest
➢ Future regulation focus on
collection and use of data
that is fit for purpose.
Contemporary regulation much
more customer centric
➢ End user privacy and data
➢ protection (Cambridge
Analytica)
➢ Digital footprint
Why Regtech
Regulators are interested:
1) Improved supervisory tools
2) Increased competition
3) Financial stability and market
integrity
Businesses are interested:
1) Manage complex disclosure
requirements.
2) AI as a new “digital officer” to
supplement human capital.
3) Cost minimisation opportunity
for companies.
Why Regtech
Systemic industry wide non compliance → a legacy and culture of non
compliance
Royal Commission – charging advice fees to dead clients via their deceased
estates (CBA, AMP)
Reactive regulation → enormous fines applied after the fact → everyone is
worse off
Royal Commission was launched after the fact and uncovered two decades of
malpractice.
Regtech is swept up in the movement to create a culture of proactive and
progressive regulation → effective prevention, monitoring and deterrence to
pre-empt non-compliance.
Regtech Types & Applications
Deloitte – Regtech Universe
Risk Management
– Gaps in business processes
– Potential regulatory pitfalls
– Eliminate risky behaviour preemptively
Know Your Customer (KYC)
– Customer identification
– Establish needs from data
– Drive recommendations
Transaction Monitoring &
Reporting
– Anti-Money Laundering (AML)
– Malicious & non-compliant
transactions
Regulatory Intelligence
– Processes and practices
incorporate latest rules
– Enable staff and systems to
adjust and adapt
Red Marker
Automatically analyse marketing content for probabilistic compliance risk and
provide a workflow solution to manage the compliance process.
Develop
compliance
checklists
Convert legal
checklists into
digital rules
Upload content
and apply rules
Web content
scanning for
compliance risk
Document
scanning for
compliance risk
Review and
solve identified
risks
Finalise and
approve
content
Red Marker
Comprehensive & Real-time
• Marketing and public facing content broken down into individual terms and
packaged for analysis.
• Rules engine vet content in real time.
Upskilled Workforce
• Copywriters and content creators receive actionable and contextualised feedback.
• Reduce non-compliance instances in future iterations.
• Human capital is freed for creative endeavours.
Flexibility
• Use ‘out of the box’ standardised industry specific compliance rules.
• Support internal risk and compliance teams to build rules specific to your field.
Activity 2
Q1: What is Regtech? What is it designed to achieve?
Q2: Why is Regtech the next logical step in compliance and regulation reform?
Can compliance and regulation persist in its absence?
Q3: Outline the various types and applications of Regtech. Where are Regtech
efforts most concentrated?
Q4: Describe Red Marker’s product. Which Regtech category does it fall into?
Q5: In How does Red Marker’s compliance mark up add value to an
organisation?
The Past and Present
Pre-2018
– Random audits, disparate systems
and processes, minimal reporting
requirements.
– systemic operational, cultural and
institutional risk factors.
Status Quo
Non-existent & grossly inadequate compliance
decision-making frameworks
– Minutes of meetings written on napkins (IOOF).
– Incorrect and conflict ridden advice.
– Fee for no service.
– Dead clients charged fees.
The future of compliance
Personal Data
Regulation Digital Identity
Where we are…
•Digitization of
manual reporting
and compliance
processes.
Where we need to be…
•Weighted approach.
•Near real-time and
proportionate
regulatory regime.
Regulatory Sandbox
Sandbox
– Framework set up by an industry sector regulator.
– Allow small scale, live testing of innovations by private
firms in a controlled environment.
– Eligible firms operate under a special exemption,
allowance, or other limited, time-bound exception.
Concept
Financial Services
– Framework set up by an industry sector regulator.
– Allow small scale, live testing of innovations by private
firms in a controlled environment.
– Eligible firms operate under a special exemption,
allowance, or other limited, time-bound exception.
Application
Regulatory Sandbox
Fintech operators trialling new innovative products can under ASIC’s
supervision:
• Rely on existing statutory exemptions or flexibility in the law – such
as by acting on behalf of an existing licensee.
• Rely on guidance and resources from ASIC’s Innovation Hub for the
testing of certain specified products and services.
• For other services, rely on individual relief from ASIC.
Sandbox environments asymmetrically benefit innovative companies,
particularly start ups. Exemptions and reliefs only apply to new
innovations. Legacy products and distribution models must continue to
abide by standard measures.
A Tale of Two Standards
FINTECH + INNOVATORS
– Sandbox environment to test
innovation features.
– Exemptions for licencing
requirements.
– Relaxation of applicable laws
and administrative rigmarole.
– ASIC’s Innovation Hub to
provide tailored guidance to
marketplace lenders
TRADITIONAL INSTITUTIONS
– Little relief for deviations from
prescribed operating protocols.
– Must abide by all laws and
requirements at all times.
– Far fewer resources to
assistance with non-compliance.
– Negative social inertia from
Royal Commission fallout,
regardless of whether at fault.
Rationalisation
Current Regulatory Environment
– Fintech and Regtech treated
leniently by regulators to foster
growth.
– Traditional service providers face
the full licencing and compliance
requirements.
– Existing framework is inherently
disproportionate and unsustainable.
The Future…
– Unified: An integrated and
technology agnostic regulatory
regime.
– Real-time: Open data frameworks
allow real time monitoring.
– Proportionate: data-driven
regulatory responses to compliance
issues = fair (c.f. ‘one size fits all’).
Activity 3 (Also Part of hand up 2)
Briefly Discuss below. You will need to hand up answers in Week 8.
Q1: How has the regulatory changed over the years (pre-2018 vs. the status
quo)?
Q2: What is the future of compliance and how does it compare to where we
are currently?
Next Week
Regtech – Lecture 2
• Understand the incentives and pressures driving change in
compliance matters for financial services.
• Define and discuss the various aspects of compliance and how
they influence the development of compliance systems.
• Examine the differences between black box and white box
testing in system audits.
• Evaluate the growth drivers that underpin the sustained
technological evolution of compliance software.

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