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BFCSA: Banking royal commission: Regtech software a pathway for post-Hayne compliance

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Banking royal commission: Regtech software a pathway for post-Hayne compliance

Australian Financial Review 01 Feb 2019 2:30 PM

James Eyers

 

The rise of regulatory technology to help banks comply with the rules seems inevitable: it's beyond human capacity to keep abreast of every global financial services law and regulation.

But ironically, the Hayne royal commission appears to have made banks more risk-averse and reluctant to embrace new systems, even though it has become clear their past practices have fallen short.

Regtech entrepreneurs hope board directors will be the drivers of new solutions; after all, the buck stops with them to know what's going on.

Their first hurdle will be weaning boards off their long-running relationships with major global technology vendors such as IBM, or the big four consultancy firms, even though they failed to steer banks away from the regulatory mire.

But the start-ups are up for the challenge. Over a couple of days, AFR Weekend found three in the market offering software to help the banks improve compliance, save costs and even strengthen prudential capital ratios.

One is Risk and Capital Compliance Solutions (RiskCapCom). It has mapped out the Australian Prudential Regulation Authority's APS110 standard on capital adequacy sentence by sentence, setting out the specific requirements needed to satisfy the regulation and managing the process of becoming compliant. Commonwealth Bank, Westpac, National Australia Bank and Macquarie have already met with the company.

Anonymous feedback

Another is Pax Republic, which is deploying artificial intelligence technology to help boards and management make sense of anonymous staff feedback to uncover risk culture failings. It is working with one of the big four accounting firms.

A third regtech is Skyjed, which has developed a system for auditing products already in market to determine whether they're adopting best practice. It is being used by banks in Germany and Switzerland, and has one customer in the local financial services sector. Like the others, it's hoping for more.

The RegTech Association is working with regulators, banks and start-ups to accelerate adoption of its wares. It is making progress, but it's a tough slog.

"Regtech is getting plenty of talk time, but not much action," says one of its directors, Lisa Schutz.

She says it takes an average of two years for a bank to begin a pilot after the first meeting with a start-up. "Compliance teams are naturally risk-averse and don't get rewarded for innovation. Until there is institutional appetite, banks find it easier to focus on remediation and mopping up," says Schutz, also the founder of regtech start-up Verifier, which assists with income verification.

"But if they don't reset and start seriously supporting innovation in regtech, they will starve the start-ups, and it will be left to their internal teams.

"It is obvious automation is needed in compliance because it has lagged the automation of everything else."

RiskCapCom offers a vision of the way the future might go. Former Reserve Bank governor Glenn Stevens is a fan, having reviewed a demonstration of the software and told the company it was "very promising". He has introduced it to organisations in the industry.

AFR Weekend also received a demonstration of the software. APRA's APS 110 standard has been broken down into 76 "requirements", under which are set 784 detailed questions banks need to answer via the platform to be comfortable they meet the prudential standard.

International standards

The system manages the assignment of the questions, which can be directed to staff throughout a bank, and then manages and audits the answers. Documents can be attached, and reports for the prudential regulator automatically generated. Gap analysis tells directors or management where they are non-compliant.

"The continued exponential increase in the volume of laws and regulations have made it humanly impossible for bank personnel, and in particular bank board directors, to manually keep track of and link them all together. It may have been possible 10 years ago but it is most definitely no longer possible now," says RiskCapCom's founder and chief executive, Zeyn Adam, who was a member of the team that developed the original Basel II Accord, which sets international banking standards and helped to implement the rules in Britain, the United States and the European Union.

"So software systems have to be created to allow banks to automate, co-ordinate and link all the regulations and their compliance processes. This is the basis and purpose of what regtech was created to solve. Without the use of purpose-built regtech solutions focused on specific domestic regulations, royal commissions happen and will continue to happen."

RiskCapCom's main product, known as the ICAAP Constructor, is being used by Sberbank (Europe's fourth largest bank and the largest in Russia) and the Central Bank of Russia to supervise more than 530 banks.

Adam developed the software while working in Russia, while he was modernising the country's banking laws. Australia is its second market.

The system contrasts with other products on the market, such as Juno, Triline and IBM's Open Pages, which are regulation-agnostic and typically reactive, while many banks and consultants still use out-of-the-box Microsoft Office products to monitor information flows.

"The public will find it difficult to believe that many banks use an Excel spreadsheet and Word document to seek to co-ordinate compliance with complex onerous regulations which impose severe non-compliance penalties," Adam says.

He says the existing system of manual compliance processes, siloed and unstructured, that many Australian banks use "essentially guarantees non-compliance and provide bank boards zero visibility on core compliance requirements".

Another promising local regtech start-up, Pax Republic, has built a conversation platform, allowing leadership to study staff feedback gathered on an anonymous platform called C-Sight. It might have helped Commonwealth Bank understand staff perceptions of risk culture after the AUSTRAC proceedings, or Westpac to manage its Project Navigate after management got concerned that bad news wasn't being reported up the chain.

"It is a tool to understand a root cause , and the rich quality of insight can tell you what to do next," says co-founder Barbara Sharp, a former journalist and public-relations manager.

"We get conversations going with hundreds of people, with a facilitator. [Artificial intelligence] is used to triangulate sentiment, so within the noise of talking in text we can see the main themes."

Gap in auditing processes

A third start-up, Skyjed, has built a system for banks or other companies to manage the governance and improvement of their products in the market. It can provide a dashboard to a board or management showing how a particular product matches up to the rest of the market, including on non-financial indicators.

While there is plenty of software available to develop new products and agile processes, including from Atlassian, there's a gap in auditing of products post-launch.

"Banks have lots of discipline on sales and financial metrics but there are few digital tools to help with post-launch monitoring and reviewing – the current governance frameworks are inconsistent and ineffective," says Skyjed's co-chief executive Leica Ison. "But product trust comes from auditing and improving in-market products."

Regulators are loath to endorse particular technologies. But APRA and the Australian Securities and Investments Commission are becoming increasingly interested in how regtech can improve risk compliance. The federal government has given ASIC an extra $6 million to promote Australia as a leader in regtech, which it hopes could become an export industry.

Where many of these new offerings differ from existing software is their emphasis on prevention rather than just logging operational risk losses or near misses because of compliance breaches.

"Regtech solutions need to provide board directors real-time oversight of a bank's compliance status, and actively involve the board directors in the creation and review of compliance and governance matters," says RiskCapCom's Adam.

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