Technology is playing an ever-increasing role in regulatory compliance among financial services firms
When Swiss-based banking systems house Temenos published its latest annual banking survey, one statistic leapt off the page. After quizzing 198 senior bankers worldwide, the company found that regulatory pressure was viewed as a major driver behind technological change.
More than half, 53 per cent, of the respondents believed that regulatory pressure would force banks to update their older computer systems. And a quarter of those bankers cited regulation as the biggest challenge they face.
The causes for this are not hard to find. The banking crisis of 2007-8 and the ensuing global recession have left deep scars. As the Temenos report states: “Governments and central banks have tried to atone for a perceived lack of regulation leading to the credit crisis and to put in place the safeguards to prevent another crash.”
A more brutal assessment comes from Lee Meyrick, director of information management in Europe at Nuix, a software house that allows accounting firms and similar bodies to dig out the data regulators need. “There is a public mood that the regulators should go after the banks with gusto,” he says. Popular emotion may not always have figured highly in the calculations of bankers, but the current climate is not giving them much choice.
Nuix’s software is used by bodies such as the new Financial Conduct Authority and the Serious Fraud Office. It reaches into massive amounts of financial data and allows investigators to ask specific questions, and then develop a line of inquiry based around that initial request. Mr Meyrick says technology matters much to regulators because “it allows them to have a lot more confidence that what they are getting is right for their inquiry”.
Well-organised information can be presented to the regulator without any delay. And Mr Meyrick points out that this means an institution can avoid antagonising compliance officials. “Saying ‘It’s a problem to retrieve this data’ is not the way to respond to a request from a regulator, it means you get a fine,” he warns.
Technology is clearly part of the solution to increased regulation and scrutiny
Lawyers refer to unveiling documents as a process of discovery and products such as Nuix’s are part of a family of programs known as e-discovery systems. The appetite for effective e-discovery can be gauged by the pressures on one bank Mr Meyrick is familiar with. “They had 3,500 requests for information from regulators around the world in the course of just six months,” he says.
Financial institutions have implemented their own e-discovery frameworks to keep regulators happy. The result of giving rapid responses to requests for data is that regulators become confident that everything is in order and reduce the scale of such requests. In theory, the e-discovery software pays for itself. If the regulators know that any query will meet with an extremely prompt and accurate response, they are far less likely to resort to the more onerous scrutiny they reserve for any organisation suspected of keeping poor records.
Munich-based software company Brainloop stores information in a secure part of the cloud and assigns very specific access rights to sensitive data. By detaching these files from the bank’s IT infrastructure, it creates a highly secure environment where only a handful of authorised people can decide who gets to see what information. This in turn lets the bank demonstrate to regulators that information is being correctly managed and shared. Brainloop has more than 200 users in the financial services sector, including Société Générale bank and insurance giant Allianz.
Johannes Hertz, a former London investment banker, now works as chief financial officer for Brainloop. Despite widespread scepticism about the ethics of banking, Mr Hertz is adamant that his customers care deeply about getting things right. “In the City, people are incredibly serious about compliance. You have a very short career in banking if you’re not careful with confidential information,” he says.
Technology is clearly part of the solution to increased regulation and scrutiny. But it can also create problems. Simon Appleton is in charge of regulation at Kinetic Partners, a consulting firm specialising in financial services. He notes that while the right technology is essential to get reporting in shape, the rise of computerised trading systems has raised serious worries about a robotic crash taking place before human intervention can prevent it. “Trading is becoming more automated and the regulators are particularly nervous about this,” he says.
These automatic trades are under the control of sophisticated algorithms and Mr Appleton singles out this trend as a new danger. He says: “Regulators fear that computer-generated orders could crash a market, so it is very important to have controls in place and to test those algorithms for any flaws.”
Reporting on the back of such complex systems is not as daunting as it might seem. The creation of a central data hub, where all trading information is collected, should go a long way to reassuring regulators, says Mr Appleton. Such an exercise might cost more than £1 million, but in the context of keeping regulators happy, this is small beer.
With the arrival of new challenger banks and the rise of purely online entrants in the retail banking space, the financial services sector has plenty on its plate. But critical judgments from regulatory bodies will only lower the public standing of this already battered sector. As the Temenos report concludes: “In the end, it may be that it is the regulator, rather than economics, that forces banks to renovate their IT estate.” The smart money is on introducing technological change before it is imposed from the outside.