RegTech and beyond

Is re-regulation, not deregulation the answer to the financial world’s continuing woes?

The amount of financial regulation in the world continues to increase, creating an ever-growing burden on banks and other financial institutions. Banks only have themselves to blame, goes the pervading view, creating exploitative situations such as sub-prime mortgages and credit swaps, thus collapsing the bond of trust they maintained with their customers.

But the reality is that we all suffer under the cosh of increased bureaucracy and cost, with no real benefit other than (we hope) reducing the risk to ourselves of being exploited, or indeed, of the 2008 financial crisis from happening again. In part the collapse of global finance was caused through direct exploitation, but a bigger crime was how financial organisations demonstrated their institutional incompetence.

They had one job — to support and protect the dollars and cents of their customers — but organisations from Lehman Brothers to RBS showed not only their ineffectiveness against corrupted behaviours, but also their poor grasp of shared risk. Above all, and even with the caveats of how complex the situation became, our smart-suited financiers proved themselves to be really crap at maths.

The result was the undermining of global confidence. “2008 saw the collapse of trust and legitimacy,” said Anne Leslie-Bini of consulting firm BearingPoint, at a recent analyst event in Paris. “Governments, central banks and trusted financial intermediaries found themselves brutally exposed, meaning the public lost faith in the very institutions that are meant to represent, protect and further their interests.”

We are still dealing with the consequences, one being more power in the hands of the regulators — whose systems were also proved to be ineffective, but who no doubt feel the are doing the right thing by creating more. The result is a continued flood of regulations — nearly ten times as many publications being released per year compared to pre-1994 levels. “There is no end in sight,” continued Anne.

Of course regulators will have the best intentions, but the effect is to stymie financial institutions without necessarily dealing with the potential for rogue trading, product mis-selling or other, yet to emerge financial malpractice or imploding bubble. It reinforces the notion that working within a regulation is by definition ethical — the “I did nothing wrong” school of thought.

At the same time however, we are not seeing any regrowth of trust. Precisely the opposite could be said to be true, in this environment of fake news and political spin. We live in a context of post-truth where nobody knows who to trust, which can be exploited by both the untrustworthy and those looking to gain from promoting distrust. Such a situation ultimately serves nobody.

We are neither willing nor likely to go back to that rose-tinted world where the default behaviour was blind trust in our institutions and elders, as computers and the economics of big business have put paid to that. All the same we need a rethink in how we develop and deliver regulation, one which aligns with how the world is today rather than trying to follow a historical, institution-based model.

According to Anne Leslie-Bini, this is the opportunity presented by regulatory technology (RegTech) — we can fight like with like, creating regulations according to the same principles as the technologies used by institutions. So for example, rather than expecting banks to produce monthly reports, access to banking data should be available in real-time, via APIs.

Such ideas can be taken much further, however. If we are in the platform economy for example, regulation can, and should be built into the platform. Just as “Data should come out of the pipe clean,” as Cisco’s Charlie Giancarlo once pointed out, so should it be expected that the virtual money coursing around our networks is correctly sourced and with traceable provenance (using Blockchain, for example).

Thinking beyond technology, a third pillar is to consider how business practice is changing and to expect regulation to follow suit. So, if agility, scalability, co-creation and customer experience are key levers for driving business value, so should we expect agile, scalable regulation and so on. Co-creation of regulations is a model already tested and being proven by regulators and financial organisations in Austria.

Such thinking is a long way from the expectation of sheep-like compliance with laws conjured up by some inaccessible people in a distant corner of the globe. “As long as we are operating in a system where we have to constrain behaviours that act contrary to the common good, regulation will always be playing catch-up.,” says Anne.

The future is not about de-regulation but re-regulation, delivering models that enable our very necessary institutions to fit how the world works today. Regulation should not be based on building ever-higher walls around our financial institutions but aimed towards striking a balance, to deliver the right levels of protection for citizens and businesses within a framework of ethics that increases, rather than undermines trust.

[Disclaimer: BearingPoint is a client]

5 Responses to “Is re-regulation, not deregulation the answer to the financial world’s continuing woes?”

  1. “Governments, central banks and trusted financial intermediaries found themselves brutally exposed, meaning the public lost faith in the very institutions that are meant to represent, protect and further their interests.”

    We are thinking the same. Thank you Jon good article.

  2. Nice piece Jon. Few thoughts.
    – Interesting to consider the potential implications of fintechs which have so far crept under the radar of many financial regs that inhibit banks. Watch this space for how that turns out.
    – On trust Q. I think there is a difference between trust and like. People still don’t like banks (bankers). They don’t expect them to behave well. But they still trust banks as the best place to keep value. Many fintechs are learning this fact as they confront the cost of customer acquisition.
    – On trust Q. Interesting to reflect if a lost generation (lost to the banks that is) may have broken that residual transfer of trust in banks between parent/child. If so, it will be more because of relevance to the way they live their lives, rather than trust.

    • Jon Collins

      Thanks for the feedback. I wonder if that is because people see no alternative, with fintechs being tarred with the same brush but being new and therefore higher risk?

  3. Real prison terms, lifetime bans, and corporate fires that could put a company out of business.

    Otherwise, meeting regulatory requirements is seen as optional.