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The Real Purpose of Regulation

Tuesday 23 May 2017

The AML/CTF Act is not about compliance. It is about tackling financial crime. Eric Frost, cofounder and CEO of Simple KYC—a member of the newly-launched RegTech Association—spoke to GRC Professional.

“You can argue about the regulation itself and get into to a lot of details, but the purpose is often forgotten about in industry,” Frost said. “They should always have the big picture in play of what we are trying to achieve.”

Unfortunately, the predominant focus on compliance comes from the increasing and shifting regulatory burden.

Since the Global Financial Crisis, regulation has increased rapidly—foremost as an assurance against history repeating itself. However, for many, the process has proved extremely expensive.

Chami Akmeemana, Executive Director of Regulatory Solutions at ConsenSys, wrote in
Blue Notes that in 2014, the top six American banks had spent over $70 billion on emerging regulation. In addition, he noted the threat from disruption and emerging fintech start-ups had also been a challenge, as incumbents raced to disrupt themselves before they were disrupted by someone else. 

For compliance, the challenge comes from the fact that, often, existing processes can’t keep up.

Akmeemana writes:
…current compliance systems are rife with manual, repetitive and tedious tasks. Some of these processes are a result of laws which demand a certain technology—or even paper—be used. Other inefficiencies are simply a result of a failure by lawyers and compliance professionals to innovate.

According to Frost, however, this is where technology solutions can help businesses, despite how these things are often viewed as another financial burden. When used judiciously, however, technology solutions can relieve what can be a very labour-intensive process.


From regulation to compliance solution
“Regulation comes in, and then you go through a period of pain,” Frost said. “But often, ‘solution mode’ only happens way down the road. This is because when legislation comes in, process review and compliance understanding usually become part of that manual solution implementation process.”

It is true, also, that this process sometimes occurs long before technology solutions get released.

“Today, I think RegTech is very reactive,” Frost said. “Our business is very reactive. If you look at when the AML/CTF came into effect, identifying individuals was a manual process. My understanding from Big Banks, when someone put a cost to on-boarding a customer, it was around $30 to $40, on average.”

Subsequent electronic verification and other technology solutions have cut costs considerably. However, the problem remains that technology does not always act as an instant solution. It can take a 10-year cycle to move from problem, to solution, to implementation. And the scale of that implementation needs to also be considered.

“This is where RegTech has the advantage of bringing it all in unison and making it more proactive,” Frost explained.


Will there be a common platform?
The development of The Regtech Association does bring awareness to the different technology solutions out there, but some organisations may have concerns when it comes to notion of all these providers, with very specific products, being plugged into their business.

“Part of the Association’s brief is to create and enable collaboration,” Frost explained. “And I think certain companies—certainly in their clusters inside the Association—will find similarities and collaborate just like they do at Stone & Chalk. I think it is probably too hard to create one platform, when we’ve got all different types of customers, different problems, and different stakeholders. The reality of a single platform is still a ways off.”

Arguably, however, there remains a point to be made about technology companies working with regulators and industry to achieve a common end-goal, especially when it comes to tackling financial crime. After all, the real purpose of regulation—across any sector—is too important to ignore.