Banks have 10–15% of their staff dedicated to compliance. Regulatory divergence (costs, risks, impacts) costs financial institutions 5–10% of their annual turnover (on average) according to a study cited in the Cost of Compliance 2018 Report. This consumes senior management time and capital that could otherwise be focused on identifying emerging risks in the financial system. These costs are a barrier to international growth – more than $780 billion annually in costs to the global economy are conservatively inferred by the findings.
Source: Cost of Compliance 2018 Report
771 RegTech companies are operating around the world across seven segments:
Use cases of RegTech solutions cover a broad range of applications: identity validation, risk management (which includes scenario modeling and forecasting), transaction monitoring & auditing systems, web due diligence & security, identity controls – these are just some of the cases where technology startups are actively filling the gaps.
Numerous case studies prove investments in regulatory technology to be bringing material benefits to businesses across industries – efficiency, UX, and usage improvements, and a lot more.
Fenergo’s case study demonstrates some of the opportunities in improving operational efficiency that regulatory and compliance software opens for institutions. For Fenergo’s global investment banking client, it took 27 hours to complete the KYC review process for one medium-risk client on average. And that calculation did not even include additional elapsed time for review, the time it takes for clients to respond to the financial institution’s request for additional or updated data and documentation. With 2,500 to 3,000 clients classified as ‘medium risk,’ it meant that the KYC client review process for medium-risk clients took between 67,000 to 81,000 hours to complete for that client.
The implementation of Fenergo’s rules-based workflow platform, which supported the end-to-end cycle time for KYC remediation case handling, resulted in a 37% improvement in case handling time and efficiencies for the medium client risk category alone. This reduced the average handling time for each case down from 27 hours each to 16.47 hours, shaving off a cumulative average of 27,380 hours in total for the medium-risk client category for the investment banking client.
IBM’s work with Continental, a company that develops intelligent technologies for transporting people and their goods, is another interesting case. Continental is a massive organization that employs 220,000+ people in 56 countries, with risk, governance, and compliance are among the top operational priorities. The challenge requiring a solution was for Continental to gain insight into exposure across its subsidiaries worldwide to steer clear of business risk and come up with effective ways to mitigate the threats. Continental used IBM’s risk, governance, and compliance platform to perform broad-scale risk assessments across its worldwide operations and saw 75% fewer risks assessed at Corporate Level, as minor threats are addressed lower down. Moreover, Continental was able to consolidate six risk management processes and four systems into a single solution.
ABSA Bank’s Corporate & Investment Banking (CIB) division is another one of IBM’s clients. ABSA Bank’s CIB division required an integrated platform that could present a single, accurate view of counterparty credit risk, and meet the needs of the business, its clients, and its regulators in South Africa. The CIB team used IBM Algo Credit Manager to aggregate all limits and exposures and provide a single trusted view of risk for its South African operations across industry segments, banking products, and trade products. The institution saw an 85% reduction in time taken to produce a single view of risk and $2.3 million in net present value at an internal rate of return of 51%.
IBM’s work with HypoVereinsbank (HVB), which employs more than 12,000 people across around 300 branches in Germany, is another vivid example. By using IBM OpenPages software, HVB could automate reporting processes and simplify tracking for over 3,000 internal controls. As a result, HVB saw a 33% reduction in personnel requirements thanks to better use of existing resources, as well as increased efficiency through automating risk & control self-assessment processes, and gained the ability to gain new insights into risk and control, helping to identify gaps as well as resolve glitches quickly.
eSecLending, a financial services company providing securities financing, collateral & liquidity services, and default management solutions to institutional investors and clearing organizations worldwide, is another case worth looking at. When eSecLending (which uses market data to analyze risk for clients’ loan portfolios) saw its existing data provider’s fees rising and data often incomplete, the company switched to IBM Algo Risk Service on Cloud to provide daily risk metrics and stress tests for each client’s portfolio.
As a result, eSecLending saw a 20% cost savings on market data by moving to a single supplier for data and analytics, a 42% increase in the number of instruments analyzed per day (from 7,000 to 10,000), and four times as many scenarios simulated daily, thereby making risk assessments even more robust.
KLP Kapitalforvaltning is a subsidiary of KLP, Norway’s largest mutual life insurance company with more than 700,000 members from municipal and county authorities, health trusts, and other publicly owned companies. It adopted IBM Algo Risk Service on Cloud to model risk across all asset classes. As a result, KLP provided each user with instant web access to key risk measures and timely, personalized reports. The company saw a 200% rise in active users as decision-makers managed portfolios and risk.
Jefferies, which offers a broad range of products and services spanning investment banking and holds $11.4 billion in long-term capital, set out to enhance its offering by providing hedge-fund clients with deeper, more accurate insights into risk across their portfolios at a lower cost. With the same solution as eSecLending and KLP, Jefferies saw a 90% reduction in reliance on previous data vendor, 20% shorter cycle times (which reduced the risk of delays to critical reports), and was able to expand special margin rules to a broader range of clients at no extra cost.
But IBM is major league. Today, RegTech startups have a lot to show for years of growth of development as massive financial institutions are actively implementing their solutions. Ayasdi’s work with Citi is an excellent example of a tech startup playing in a major league. Citi, one of the largest institutions in the world, consistently struggled to pass its annual stress test – it failed two of the first three stress tests. The bank was in need of a method to rapidly create accurate, defensible models that would prove to the Federal Reserve that they could adequately forecast revenues and the capital reserve required to absorb losses under stressed economic conditions.
To address the issue, Citi chose Ayasdi to supplement its capital planning process, beginning with Ayasdi, the macroeconomic variables stipulated by the Federal Reserve to create over two thousand variables. Further, ML-powered software was used to correlate and analyze the impact of these variables on each business unit’s monthly revenue performance over a six-year period, uncovering statistically significant variables that were highly correlated with each business unit’s performance. The exercise with Ayasdi allowed the bank to clear its regulatory hurdle. The process compressed the resources required for a nine-month process requiring hundreds of employees to a three-month sprint with less than one hundred.
Ayasdi works with a number of institutions, for one of which it was asked to tackle AML. The bank had a goal to improve operational efficiency in the KYCC area by 3%, with a stretch goal of 5%. Using Ayasdi’s AML solution, the bank achieved reductions in the investigative volume of more than 20% while lowering its regulatory exposure by discovering new risk segments that had previously gone unnoticed.
Another financial institution, the Rabobank Group, had an issue that was solved by RegTech integration. A lack of a common, integral system for vetting trades across the Rabobank Group made it difficult to identify and understand what checks had been made, on which shipments, and when. It was also difficult to track the information and reasoning used in the decision-making process, and not being able to demonstrate these checks and the associated rationale to the regulators was a core concern. This lack of audit and proof did not correlate with Rabobank’s compliance team’s goal to ensure the bank was meeting all the necessary standards to manage its risk effectively across all parts of the organization.
After the implementation of Accuity’s Compliance Link Trade Finance solution, the Rabobank Group was able to increase operational efficiency, reducing 15-minute checks down to three minutes. By redistributing the workload with a clearer and more efficient process, the compliance team was able to focus on more important tasks, such as expediting trade bids and prioritizing customer satisfaction, while effectively and confidently serving & operating in some of the world’s most complex jurisdictions.
For financial institutions to be able to fully harness the obvious and proven benefits of software adoption for risk, governance, and compliance functions, investments in regulatory technology cannot be seen purely as extra weight in expenses. Numerous case studies prove the adoption of RegTech solutions to bring immediate or short-term positive implications on operational efficiency at the least, and significant reduction of the cost of resources deployed for supporting the compliance and risk management functions.
“We believe the move towards a more data-driven and granular approach to supervision will improve scrutiny of the financial sector and help ensure better outcomes for market participants and consumers. The use of RegTech is an important tool in supporting that process.” – Patrick Armstrong, Senior Officer of Financial Innovation, ESMA, said.
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