The financial services industry is being whacked with regulations- making the time and monetary cost of compliance grow out of hand. A lot of Independent financial advisors (IFA’s) don’t have the resources at their disposal to keep up with the industry’s compliance demands and can invest somewhere between 30% and 60% of their time making sure that the books are clean. This time invested into compliance is eating into the advisor’s actual ability to be client facing and generate an income. With the much-anticipated Retail Distribution Review (RDR) beginning to hit the South African market, the costs of compliance will only increase.
Over the past few years, technology has swooped in to automate, facilitate and enhance the ease of doing business across all industries. The financial services industry is still in its technological infancy relative to other industries and who can blame them? This is people’s financial well-being we are dealing with, there is far less wiggle room to transact based on convenience in this space. Don’t get me wrong though, there are multiple, very innovative, Fintech companies which iron out different industry pain points, but nothing quite on the scale as what Amazon has done for retail or Airbnb to hospitality. There isn’t technological neglect, but rather just a whole host of complexities to consider when introducing a complete end to end Fintech solution. One of these very complex beasts to consider is that of compliance and regulation- these technologies need to prove long term sustainability in this regard.
That is a pretty negative start I know, but bear with me, there is some good news coming!
Enter supervisory technology (SupTech)- the solution to improve the efficiency, effectiveness, and scope of financial supervision. This will save supervisory firms and, indirectly, IFA’s the exorbitant time effort and costs which exist in the current supervisory process. The SupTech solution looks to streamline administrative and operational procedures, improve analytics and digitize working tools and data for supervisory agencies. SupTech represents the shift away from the traditional procedures which focused on auditing past data by means of extended onsite inspections often leading to overdue supervisory action. By making use of better data collection and analytics, greater storage and mobility capacity (cloud storage), the supervisory action will be pro-active, more cost effective and less time consuming.
In SupTech’s shift away from templates and manual procedures, it promises to assist in data input and data pulling abilities, reporting functions, unscrambling data, cleaning data and last, but not least, regulatory submissions. Through supervisory agencies assisting with these aspects, onsite audits will become unnecessary going forward. Currently, an onsite audit is the only way for a supervisory agency to detect any violation, which would nearly always be in the past. Now that SupTech will assist with data cleansing and capturing of data, the supervisory agency will have immediate access to the information. This means that a supervisory audit can be done remotely and digitally, this will also mean that there will be more frequent engagement between regulators and institutions.
For these SupTech systems to operate optimally, all that would be required is for the IFA to capture information into an integrated system as opposed to a piece of paper so that the supervisory agency can pull the information as and when they make an audit. This would mean that if the IFA can make use of digital means to conduct business with clients, the data would be recorded as he/she goes about their day and their compliance would be getting done in the background. The indirect benefit this brings IFA’s is the ability to learn trends within the client base (through data analysis and reporting) and, by knowing their clients very well, be able to find new ways to attack the market and add constant value.
You may ask, but how is this proactive, it is just the same process but just a whole lot easier for the advisor. Well, let me finish!
By implementing other technologies, which have been developed around the world, such as artificial intelligence, neuro-linguistic programming (NLP) and machine learning, SupTech firms are able to identify anything untoward as it is happening. Machine learning can be used to study the market behaviour (through linked trading databases), and together with NLP, can be used to compare market/trading activity with behavioural data (communications) and identify any deviations, prompting the need for investigation. This is proactive as it happens in real time, which may allow supervisory firms to clamp down on perpetrator before the transaction is finalized.
Pro-activity will also be in the form of notifying the financial institution of any violation before the transaction can be finalized. This will ensure the advisor that each transaction he/she made was in full compliance with the industry regulations- giving him and the client peace of mind.
What’s that? You don’t believe me? Okay, well hear this out!
In the National Bank of Rwanda’s (BNR) constant effort to achieve financial inclusion and monitor its progress, they have partnered with Suneida Solutions to build an electronic data warehouse (EDW) system to streamline the reporting process which facilitates supervision. For financial institutions such as banks and well-established financial service providers (FSPs) which have sophisticated information systems, the BNR can automatically pull their data- significantly decreasing the need for compliance officers to undergo the old manual reporting process. As the BNR is integrated with these firms, the BNR can monitor the market in real time. However, the BNR is unable to automate the monitoring of the entire market as yet, due to the fact that a large portion of the financial sector have only just begun investing in the development of information systems, this means that, in those instances, there is no data from which the BNR can pull data from. The BNR has aimed to migrate the entire industry onto systems capable of integrating with the EDW within the next 14 months.
So, with all the above being said…
Picture a world, where your supervisory firm helps you in real time throughout a transaction, by digital means, to make sure you meet the regulatory requirements with each and every deal, thus being audited and cleared on the spot for that particular transaction. You won’t have to pay for a compliance officer to come in and take up your entire day going through your shelves of client documentation just to tell you that you are, in fact, compliant. With the prospect of SupTech looming around the corner, that world will be ours in no time.