In partnership with Fintech Cadence, we surveyed the Canadian RegTech community between January 15 February 28, 2020 to understand the key regulatory compliance challenges firms are facing. Respondents were asked to select their top three issues from a range of options, including topical themes such as open banking, digital ID and third-party risk along with more ‘legacy’ themes, such as regulatory reporting and regulatory change management. Surprisingly, the top three challenges were exactly the same as last year. Compliance Effectiveness ranked as the greatest challenge, followed by Regulatory Change Management and Trade Reporting. It would be interesting to delve further into the underlying issues. Does it stem from underlying technology structure and an over-reliance on manual processes? Or is it due to the movement by banks and other financial institutions towards digital transformation that requires a re-think of compliance and risk functions in order to provide a seamless and trusted customer experience? I expect a bit of both. (You can hear from RegTech experts on this topic when the CRTA leads a panel on this subject at FCCON20 Rise
We added a new question this year and asked what areas require greater co-operation between regulators and the industry. It was clear from the results that Canadian financial institutions are struggling to effectively manage data required to meet regulatory requirements. Lack of data conformity across borders was the number one issue, followed by ensuring data accuracy and completeness, and simply keeping data up to date!
Regulatory divergence can be extremely costly as evidenced by a joint report by the International Federation of Accountants with the Business and Industry Advisory Committee of the OECD. It expounded that fragmentation in global financial regulation costs to more than USD780 billion annually, consuming between 5-10% of annual turnover Data definitions were a primary factor.
For example, in the European Union (EU), market stability regulations such as MiFIR, EMIR and SFTR, require broadly similar information, but the reporting format and the means of reporting can vary, creating undue complexity and burden. Inconsistent or ill-defined data at source lead to usability and accessibility issues for end-users. The objective of European’s MiFID II regulation was to improve transparency, best-execution and fair pricing, yet data aggregation has proved to be difficult due to inconsistent interpretations of data taxonomies and formats, and varying commercial models between trading venues and specialist providers known as approved publications arrangements (APAs). Despite good intentions of the European regulators, there is a clear need to tighten oversight of data providers and re-examine the data model to ensure it is not overly complex and that it is consistent, well-defined and easily interpretable by humans and machines.
Being a smaller market, perhaps the end-user impact of disparate data models is not as great, but regulatory burden remains the same for many Canadian financial institutions due to the global nature of the banking industry. Our survey results show we do have an industry that is concerned about managing regulatory change and meeting regulatory reporting obligations. The volume and velocity of new regulations is making it increasingly difficult for financial institutions to guarantee compliance. A report by KPMG – There’s a revolution coming: Embracing the challenge of RegTech 3.0 – estimates that the global spend on compliance is $270bn and that, on average, 10-15% of staff working within financial institutions are engaged in governance, compliance and risk functions. This is hardly sustainable in a competitive environment and is reflected in the growing adoption of and investment in RegTech. Globally the market is expected to be worth $12.3 billion by 2023, up from its current market value of $4.3 billion. In a recent report by Fintech Global, where overall fintech investment was compared by subsector, Canadian RegTech companies have received the most funding since 2015, with 19% of the total funding being raised by companies in the sector.
Regulators also are looking for ways to apply technology to their processes. The KPMG report warns: “The Financial Conduct Authority is exploring how technology can make it more efficient and relieve the burden on firms. It has sought the views of firms and holds events to explore potential innovations. In the future, companies should expect mandatory requirements for tech that lets regulators scrutinize their data more effectively.”
Both regulated entities and regulators in Canada are embarking on similar data transformation journeys and will face comparable technology, compliance and cost-efficiency challenges. We do not want another ‘rinse and repeat.’ By working together, we can improve the development cycle for new cost-effective regulations helping regulators and responsible financial institutions. Now is the time to open the discussion, share learnings, and explore the possibilities.
About the Author
Donna Bales is co-founder of the Canadian Regulatory Technology Association.
As part of her advisory work at Balmoral Advisory, Donna has worked with regulated and unregulated entities on a range of strategic, regulatory, business impact and transformation initiatives.
 OECD – Organisation for Economic Co-operation and Development; https://www.ifac.org/system/files/publications/files/IFAC-OECD-Regulatory-Divergence.pdf
 Effectively sales of goods and services
 MiFIR – Markets in Financial Instruments Regulation (as amended), EMIR – European Markets Infrastructure Regulation, SFTR – Securities Financing Transactions Regulation
 MiFID II – Markets in Financial Instruments Directive
 There’s a revolution coming: Embracing the challenge of RegTech 3.0
 FT, Banks’ AI plans threaten thousand of jobs, 2017
 A report by Consultancy.co.uk, ‘The growth of FinTech and RegTech in financial services,’
 Fintech Global Report: https://member.fintech.global/2020/01/22/fintech-investment-in-canada-bounced-back-in-2019/
 KPMG Report: “There’s a revolution coming: Embracing the challenge of RegTech 3.0”