Financial Regulations Will Surpass 300 Million Pages by 2020 Says JWG

RegTech, the use of technology to meet the growing number of financial regulations, needs a nudge from regulators, according to JWG, a London-based think tank with an unenviable focus on regulation.

“JWG estimates that over 300 million pages of regulatory documents will be published by 2020 and over 600 legislative initiatives need to be catalogued by a medium sized sell-side institution in order to have a holistic view of their rulebook,” the company wrote in a letter to the Financial Conduct Authority (FCA) in 2016.

“Based on the FinTech futures analysis, we estimate that between £50 billion and £60 billion a year is being spent in the UK on meeting regulatory obligations.  This is equivalent to 2.6 percent of UK GDP, double the annual revenue of a Big 4 firm, or nearly twice the size of the UK legal services market for all industries.”

When JWG look at the industry’s regulatory challenges in 2010, it expected that financial firms would retool their technology to meet the new demands, the consultancy added.

“… but six years later new regulations are coming into play that legacy systems cannot support.”

The reason costs are so high is that financial firms are responding with “reactive and costly tweaks to an antiquated system,” such as a tweak to COBOL code that was designed to work with shillings and pence,” it said.

“Despite the promise of new technologies, these are often slow to be coded to the specifications required and, therefore, it appears easier to spend professional services fees of £600 to £10,000 per day than to look hard for a better solution.”

The company called for a Regtech commons “where technology suppliers can interact with their potential customers to understand their issues and shape the ways in which their wares can be adopted.”

Perhaps wisely, JWG does not expect regulators to simplify and harmonize their rules. It asks them to bring technologists into the conversation at an earlier stage of the rule-making process. It did, however, propose a common dictionary “that links the words used across regulations to describe the specific classes of requirements and how they apply to a particular regulation.”

Approximately 10 percent of common fields are describing the same information requirements, while standards like ISO 20022 could be a big help.

“Regtech providers need a very clear understanding of the size of the market for their solutions and the probability of sale prior to making their investment… the FCA could provide access to a cloud for testing these new standards and reference datasets, and take an active role in uploading use cases to the platform to highlight the dependencies across regulatory domains.”

Here JWG suggests the regulators could reduce the complexity by comparing and aligning proposed regulations with existing regulation to reduce complications and achieve better results for consumers.

To show the scope of complexity, JWG recounted how it cataloged 39 MiFID initiatives and documented 137 implementation risks and loaded the 100 pages of minutes describing them into its RegDelta platform. Regulators are asking firms to do compliance in unrealistically short timeframes and often wait until late in the process to clarify what is required. JWG has organized a MiFID group of vendors, suppliers and firms to discussion of common solutions for implementation but such efforts would do better with a mandate from regulators, it suggested.

Politicians make things worse because the complexity of regulations makes it difficult to see the big picture (assuming they are even looking). The EU adds to the complexity as regulations are implemented on different schedules as countries move at their own pace. (Of course if Brexit occurs this problem might go away.) In a burst of optimism the consultancy suggests regulators could help by using workload balancing optimization software.

“The absence of both a common understanding and a purposeful roadmap to implementation is a strong factor behind recent regulatory delays.”

The letter lays responsibility for much of the problem of regulatory complexity on the way regulators work and suggests they standardize and simplify the regulator environment and consider putting their publications into machine-readable formats.

“When a Regtech solution is made clear to academics, investors, vendors and firms, and it has the backing of the authorities, there will be a much higher incentive for stakeholders, both in adopting the tools and contributing to its growth.”

And it claims a special role for the UK which it described as “the melting pot for the world’s financial infrastructure.” (Although UK regulators may want to wait for the June vote before they put a lot of effort into this.)

“The bottom line is that a small push from the FCA on the implementation agenda could change the game by freeing budgets to find good solutions, unlocking the potential of powerful innovation.”

About Tom Groenfeldt

I write - mostly about finance and technology, sometimes about art, occasionally about politics and the intersection of politics and economics. My work appears on and and occasionally in The American Banker and Banking Technology in London.
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