Imagine a capital markets desk of a financial institution where a trader is about to press enter on the keyboard to initiate a market position when a message pops up on the computer screen from a regulatory agency notifying of a compliance violation before the trade is entered.
With the emergence of SupTech, that day is closer than you think.
As we know, RegTech helps institutions remain compliant through digitalization of data and processes to prevent noncompliance, improve risk management policies, and reduce compliance costs. SupTech has emerged to help regulatory agencies digitize data, operational procedures, and automate the regulatory process. As a result, SupTech may someday be able to proactively monitor a financial institution’s transactions or client’s data to prevent noncompliance or at the very least respond to a compliance violation in far less time than is being done today.
How SupTech Could Change The Regulatory Landscape
Improved Data Collection and Reporting:
Currently, many institutions send transaction history data in different reporting formats that result in an onerous process of data gathering and analyzing. And since the financial crisis, more detailed data is required by regulators including specific transactions, trades, loans, and market positions. The manual process is costly for both the institution and regulators as often times.
SupTech streamlines data-collection by automating the current manual reporting process from financial institutions. Also, reports from institutions are standardized ensuring there are no gaps in the reporting process from bank to bank. The result is reduced costs and the length of time it takes to collect and analyze the data allowing supervisors to spot violations earlier and better monitor potential illicit activity.
Often times, noncompliance fines are levied in part due to the failure to report a violation within the specified time required. As a result of poor monitoring and reporting by financial institutions, it can be months after a financial crime has occurred before the violation is identified and reported to regulators. At that point, the damage is done and a fine is almost certain.
With the emergence of SupTech, data collection and analytics are streamlined and standardized across the industry improving response times and a lower cost.
Currently, employees on trading desks receive a pop-up message on their computer screen if the transaction they’re about to enter is a credit violation or a trading-limit violation.
With SupTech, regulators can receive a violation message based on parameters the regulatory agency sets ahead of time for the type of institution and type of transaction. Savings institutions are regulated differently than commercial banks while commercial banks of different sizes have different regulatory requirements.
With SupTech, a customized monitoring system can be created per institution size or type to notify regulators of noncompliance. The result is improved accuracy and a tailored approach to that type of institution. And by having access to an institution’s data in real time, supervisors can notify of changes in regulations and violations in real time. SupTech’s real-time monitoring offers a wide array of benefits including preventing financial crimes, noncompliance and the resulting fines.
Fewer On-Site Audits:
Currently, an onsite audit needs to be performed to determine a violation and often times the violation was in the past. With the emergence of Suptech, the audit could be in part digitized and therefore done remotely reducing compliance costs to the agency and increasing frequency and engagement between regulators and institutions.
Capital Requirement Changes:
SupTech gives regulators the ability to notify an institution of a needed capital requirement increase allowing the institution to fund the capital requirement before it becomes a violation and before quarter’s end.
As with any new technology, there’s comes uncertainty and as a result potential risks and new problems. A few of the risks include:
- CYBER attacks from terrorist organizations and rogue nations could increase with the emergence of a new technology. Hacks are more likely in the early phases of development before wide-spread training and bugs are worked out of the system.
- System-Wide failures could occur. Just think of a SupTech version of a flash crash.
- Over-Reliance on technology and complacency by regulators and banks. As technology plays a larger role in the regulatory process, there’s a risk that regulators and institution employees may be less involved and miss a compliance violation or financial crime.
Just as RegTech has improved the monitoring and reporting process for institutions, SupTech has the potential to help regulators improve efficiencies by standardizing reporting and streamlining data collection and analysis. The result could not only be lower costs for regulatory agencies, but fewer fines for institutions as cooperation between institutions and regulators improve through technological innovations.