Regtech is now mission critical for financial institutions as they continue to grapple with the bombardment of costly and complex financial regulations. Huge amounts of money are being invested in regtech companies as the demand for efficient technology and solutions take on a life of their own. To put some perspective on where the industry is heading, Cappitech spoke to 10 industry experts to get their insights on what they believe will impact the regtech industry and regulatory reporting communities over the next year and beyond.
#1 Outsourcing Reporting – Set to Grow Further in 2020
Roy Saadon, CEO AccessFintech
Cost sensitivity and better risk controls are increasing the outsourcing trend, as regulatory reporting is deemed a non differentiating cost. Having been involved in multiple regulatory solutioning (EMIR, MiFID, ASIC, MAS, CSDR), we believe it is now an accepted approach that regulatory reporting is tagged as a mandatory and non-differentiating service, and as such the appetite to collaborate on processes and share costs are viewed favorably. All firms share the life cycle of preparing, validating, and distributing data, and optimizing the data manipulation is key to controlling spiraling regulatory costs. As the regulatory requirements have increased across jurisdictions and assets, there are repeating technology requirements that can address multiple regulations, and the scale of solutions built specifically for the repeat challenges increase the ROI. Thus, the move towards using vendor solutions for this purpose will increase in 2020, as the realization that internal reporting solutions don’t provide any competitive edge nor does the increased cost of doing it inadequately provide any benefit.
#2 EMIR Reporting in 2020 - The Year for Increased Data Quality
Timothy Hartley Vice President, Regulatory Consulting Duff & Phelps Ltd.
In 2020, there will be a significant requirement to improve the quality of reported data across various regimes and jurisdictions, and probably none more so than under EMIR. As the UK leaves the EU, the FCA will become responsible for the EMIR reporting of UK firms. UK based firms will now have their EMIR reporting overseen by the FCA, who are also the firm’s National Competent Authority, and this should encourage regulated firms to review and reconcile their reporting processes, now that this regulation is well established, but not necessarily well understood. In addition, the FCA and other European NCAs have faced public criticism from ESMA with regards to their supervision of firm’s EMIR reporting, and so firms would be wise to expect far greater data scrutiny, regulatory attention and enforcement actions as the NCAs increase their EMIR reporting public image. In the UK specifically, EMIR reporting has often been somewhat overshadowed by MIFIR reporting, partly due to the FCA’s active scrutiny of MIFIR trade and transaction reporting, despite EMIR reporting requiring a far greater volume of reportable fields (129 vs 85) and arguably a much more complicated and less well-defined reporting requirement. The above changes and developments all point toward a great level of scrutiny over EMIR reporting, and strongly indicate that 2020 will place a heavy focus on EMIR data quality.
#3 SMCR, Operational Resilience & Data Quality
Len Delicaet, Head of Regulatory Reporting Strategy, MarketAxess Post-Trade
Major themes for 2020 include continued focus on data quality and new, higher-order regulations governing how firms control their data end-to-end, especially where external partners form part of the reporting chain.
In 2019 ESMA and NCAs issued a number of public communiques listing common reporting errors. Firms should take each issue in turn and investigate within their own estate to ensure they are not committing these. This is why NCAs communicate their learning from observing the MiFID II data set.
In addition, in 2020, two ‘higher-level’ frameworks add further challenge to regulatory obligation management: SMCR and Operational Resilience. SMCR is basically a metaphor; “if a tree falls in your reg forest, did the relevant senior manager hear it?” Firms must take care to escalate reporting issues to senior risk/operations oversight functions and not be tempted to prevent bad news filtering upwards. Operational Resilience will demand that your firm’s reporting function have controls in place to prevent impacts they might not have introduced themselves, such as change management regression, third party-failures and/or application failures.
#4 MiFIR Reporting in 2020 – Focusing on Reporting Performance and Data Analytics
Matthew Vincent, Director London Stock Exchange Group plc – UnaVista
With the MiFID II reporting regime now two years beyond go live, MiFID Investment firms newly caught by the regime and those previously caught under MiFID I should have had time to bed down the significant implementation challenges presented by the new regime and be operating in business as usual mode. The key challenges for firms in 2020 will be to maintain the level of focus in the system implementation and governance frameworks that have been put in place to ensure that known errors are remediated, reporting performance monitored, data analytics controls are put in place and remediation undertaken to correct past mistakes.
Notwithstanding the potential for change at the end of the Brexit transition period for UK based firms, all MiFID Investment firms should not let the work done, in the run up to and immediate post implementation period, go to waste as even a perfectly implemented reporting and control framework can rapidly deteriorate if proper focus and discipline are not maintained.
Regulators in Europe continue to raise data quality concerns in public with common themes hence firms would benefit from putting controls in place to capture these and other less transparent issues ahead of the Regulator doing it for them. Tools are becoming available to do this in a regular, repeatable and cost efficient manner and firms should deploy these and follow up on issues raised in order to not fall foul of regulatory censure.
#5 Balancing Privacy with Surveillance
Shiran Weitzman, Co – Founder and CEO of Shield
The tightening of regulations has seen an increased obligation for financial services companies in providing greater visibility into their operations. MiFID II and MAR, have encouraged the surveillance of all trading-related communications, both spoken and electronic (eComms), between employees, their clients and third parties. However, GDPR, PECR and Data Protection Act (DPA), does at the same time threaten huge penalties for the misuse of personal data. This is likely to be enhanced under the forthcoming EU’s upcoming ePrivacy Regulation.
Undoubtedly firms will need to tread a thin line between privacy and business requirements when it comes to data processing, storage and investigation. This is particularly tough on trading, risk-management and research desks – all of which rely upon personal relationships and will often see business and personal information shared in mixed conversation. I believe this will open the space for behavioral-based AI platforms that can analyze each communication and focus only on the important data.
#6 Crypto & the AML Regulation
Mark Kelly, Advisory Board at Cappitech
For me 2020 will be the year that crypto comes in from the Wild West in the UK, as leveraged crypto derivatives are likely to be banned, all crypto firms have to implement Anti Money-Laundering controls and those dealing with security tokens start to register for authorisation under MiFID. In addition, a global trend will be seen where regulators and law enforcement start to peer through the fog of pseudonymity, both by the use of blockchain monitoring tools and by the widespread implementation of the FATF Travel Rule, whereby crypto transfers need to be accompanied by disclosure of the beneficial owner both at point of origin and receipt.
It’s over two years since MiFID II introduced requirements for the publication of data relating to the quality of execution and top execution venues under RTS 27 and RTS 28 respectively. Meeting the requirements involves extracting and interrogating large amounts of data and we have seen delays in firms publishing data, inconsistencies in the interpretation of the regulatory requirements and the presentation of data and a relative lack of scrutiny by regulators. During 2020, this is likely to change as regulators refine their expectations of firms and focus on the key reasons for the requirements in the first place – transparency and better outcomes for consumers in terms of informed decisions and trade execution. The additional dimension will be how firms use the data themselves to analyse and improve their performance. Firms will be expected to demonstrate how they use best execution data to enhance and objectively challenge their published best execution policies as well as how they incorporate the data within their risk management, transaction reporting, treating customers fairly and product governance frameworks. Additionally, firms should be ready to be validate the application of their approach across their governance frameworks in the form of meaningful and timely management information and key performance indicators. The importance of robust and bespoke data and reporting solutions will, therefore, be greater than ever.
#8 Retail Investment Compliance
Jason Pereira, Senior Financial Planner at Woodgate Financial Inc. and Producer and Host of Fintech Impact
This year a big trend amongst various retail investment institutions will be an increase in the digital redesigning of their processes with compliance baked into that process. Traditionally this paperwork heavy segment of the market where compliance was applied post engagement, resulting in a never-ending ping pong of paperwork and delays in implementation. Traditional vendors have learned their lesson from the methodologies pioneered by Robo advisors around the world. Risk Tolerance, IPS, and KYC can all be built into one digital customer-facing workflow that cuts out the need for countless administrators and compliance officers. What remains to be seen is if this trend sparks continued process automation, further reducing the number of instances that would require the ex-post application of compliance, and moving to compliance minded customer-centric experience.
#9 The P2P Sector in 2020
Frank Brown, Practice Lead: Risk & Transformation, Bovill
It may be preferable to talk of concentration rather than consolidation in the P2P sector. Whilst there will be some due to M&A, there will be more due to market exits.
This is a natural feature of any emerging market, with a reduction in participants, as the landscape matures. This is due to a combination of competitive pressures, and regulatory challenges. On the regulatory side, we've already seen an increased move towards institutional money. And the recent rule changes from the FCA in late 2019 will be causing some firms (particularly smaller firms) to consider whether their business models will continue to be sustainable.
M&A consolidation is likely to happen, but there are constraints. The valuations some sellers put on their businesses could do with (significant) reassessment. Firms need to consider what they are actually selling, and what the true price is (buyers, particularly those within the sector, will be less interested in the proprietary IT and the infrastructure). Aligned to the question of 'what are they selling' will be the question of risk - buyers will want comfort on the risk profile, and potential downstream liabilities. An effective control framework, demonstrable risk management and robust record keeping will give buyers far greater comfort - and firms will need to be able to evidence this.
#10 5th Anti-Money Laundering Directive (AMLD5)
Evdokia Pitsillidou, Risk & Compliance Director, SALVUS
During the year 2020, two major regulatory regimes are coming into force; the 5th Anti-Money Laundering Directive (AMLD5) and the Securities Financing Transactions Regulation (SFTR). These regimes are being introduced, following another wave of recent regulatory frameworks such as MiFID II, additional transaction reporting for EMIR and MiFIR, the ESMA product intervention measures and the 4th Anti-Money Laundering Directive (AML4). Anti-Money Laundering (AML) is in our view the area to watch and the investment funds and investment firms regulator in Cyprus, CySEC, seems to agree. Aiming to improve the quality and qualification of people employed in related areas within the financial sector, the regulator introduced an AML certification exam for those appointed as AML Compliance officers. Furthermore, the changes of AMLD5, in particular the classification of virtual currency exchange platforms and custodian wallet providers as “obliged entities”, make them subject to EU regulations which is a major step towards adoption of this up and coming concepts and mechanisms. All these have many professionals, firms and the industry as a whole in a constant state of adaptation working internally and externally with consultants, regtech and fintech companies to not only comply, but to make the most of these.
Bonus Trend from Cappitech’s CEO, Ronen Kertis
The Role of Delegated Reporting in 2020
Delegated reporting has always been an issue for the market. As a solution, delegating brokers are not big proponents of it due to the additional effort and liability it places on them, and the regulators don’t like it either. Even those firms that have their reporting delegated on their behalf by their brokers, have come to realize that it is not a sustainable and robust solution. With SFTR coming in this year, and SFTR reporting being dual sided, there is the temptation to use delegated reporting for that as well. Our prediction is that the industry and certainly the more advanced players will move to self-reporting or assisted reporting. They will choose to use external vendors as they come to understand the shortfall in delegation coupled with the benefits of having a wider variety of solutions to choose from.
Have a question or want to learn more about how to outsource and automate your reporting in 2020? Contact Us