Week 2 - Overview of RegTech solutions Complete

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University of New South Wales *

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Information Systems

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Dec 6, 2023

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Week 2: Overview of RegTech solutions The terms FinTech and RegTech are heard in the financial news almost every day. This week, we delve into the difference between FinTech and RegTech. We will explore some of the different types of RegTech systems in use and, more importantly, understand the case for RegTech. Why do we need a range of costly solutions, compared with solving the problem the old-fashioned way? Anatoly Kirievsky (Adjunct Lecturer) Week 2 Speech (Transcript) In this week, we're actually going to go into what are the different types of RegTech. We'll, from last week we'll look at compliance risk assessment, we'll look at the compliance framework and the different modules, and how different types of solutions help you to address different modules. But now we also come to the fundamental question of why use RegTech? Why not just use your standard approach of thinking about the issue, coming up with the answers, writing it down, and there you go. To answer that question, we have to think about just how complex and large financial institutions have become. A very simple question of how many laws apply to a standalone financial institution, and you'll be surprised to find that we are talking about tens of different laws that apply, and it's not just specific financial services laws. You've got privacy, information security, cybersecurity, occupational health and safety, taxation. The list of obligation continues to grow. The complexity of financial services themselves grow. Gone are the days where you turn up to the bank with your chequebook, and a very formal clerk with a pen and paper writes down your transactions. We now talk about electronic

banking, where there's multiples of channels, tens of products, different ways, international transactions, domestic transactions, different ways to transact. That all adds to complexities. Modern organisations have trillions of transactions, they have multiple laws. They have terabytes of data being generated, and this amount of data simply cannot be assessed, analysed, and understood in any other way, rather than by using systems to bring it to heat. What do we use RegTech for? It is to reduce that complexity to something that can be seen and understood by the person who is ultimately going to be responsible for managing those risks. RegTech once again, is a tool that we're going to learn about, that will help our accountable people to discharge their responsibilities.  Understand the relationship between FinTech and RegTech.  Articulate the need for Reg Tech solutions within finance and banking.  Analyse RegTech infrastructure.  Articulate the use of RegTech in managing compliance risk.  Understand the different types of Regulatory technology systems. Why is RegTech required to manage compliance risk? The role of RegTech in managing compliance risk.

Purpose This section expands on the size and the complexity of the compliance risk management challenge and the need for RegTech to address it. We revisit the compliance framework described in Week 1 and thus position RegTech to assist in creating solutions. Activity instructions Read the following articles and consider the case for RegTech by completing the following activities. The case for RegTech Compliance, as a dedicated stand-alone function, only started to emerge in the early 2000's in preparation for the revised licensing regime under the Financial Services Reform Act, whereby financial service providers were required by 2004 to apply for an Australian Financial Services Licence. Read the following articles. JP Morgan Chase hires 3,000 new staff in its compliance department The US banking group JP Morgan Chase has employed an extra 3,000 staff in its compliance department during 2013 in its latest attempt to prepare the market for the outcome of negotiations over a $770m (£440m) settlement with regulators over the "London Whale" trading incident. US prosecutors have already accused the bank of a cultural breakdown because of the $6bn losses incurred during activities that became known as the London Whale owing to the scale of the trading positions. In a message to all the bank's staff, the chief executive, Jamie Dimon, said: "Adjusting to the new regulatory environment will require an enormous amount of time, effort and resources. We fully intend to follow the letter and spirit of every rule and requirement." Anti-money laundering (AML) laws have also been a focus of the bank which, Dimon, said was "deploying unprecedented resources, dedicating senior managerial time and prioritising efforts to build and maintain an industry-leading AML programme". He said that since 2012 more than 4,000 extra staff had been assigned to control areas such as risk, compliance, legal and finance and that 3,000 of those had been hired this year. An extra $1bn was being spent on controls and 500 "dedicated professionals and several thousand others" were helping the bank submit its regulatory files on capital to US regulators. Staff had undergone 750,000 hours of training on compliance issues. Anti-money laundering (AML) laws have also been a focus of the bank which, Dimon, said was "deploying unprecedented resources, dedicating senior managerial time and prioritising efforts to build and maintain an industry-leading AML programme".

He has already announced plans to pull out of risky areas such as student lending origination and most of the physical commodities sales and trading business. The bank is no longer going to sell identity-theft protection and credit insurance to customers and is conducting an in- depth review of the overseas correspondent banking business. Do derivatives make the world safer? After you have completed the reading, respond to the question below. Once you have submitted your response you will be able to view the responses of other students Benefits of RegTech Review three key benefits of RegTech below. Cost-saving As staff and other costs related to compliance continued to spiral, it became necessary to explore automated solutions through technology. Data volume The sheer volume of data is such that it can no longer be analysed manually. Speed A number of the regulatory requirements have short or near-instantaneous decision requirements: terrorism financing alerts need to be reported within 24 hours; certain over-the-counter (OTC) derivative transactions need to be reported to the exchange within 15 min, and to trade repositories within the next business day; market surveillance is expected to be real- time. The key to RegTech is the ability to analyse data and provide information to management. For a large Australian bank, the equation involves thousands of obligations, tens of thousands of staff, millions of customers and billions of dollars of transactions. The question facing management is: are we in compliance with

our obligations? To answer this, you need to digitise your processes, analyse data, identify exceptions, collate results across the enterprise, and distil this into clear management data. In the next lesson, we look at different types of systems and how they interact with each other. Further reading The article below gives an overview of the global RegTech industry with some facts about how much the industry is growing. The Global RegTech Industry Benchmark Report Where is RegTech used in the financial services industry? An overview of different types of RegTech solutions. Purpose In this activity, we review some of the key areas where RegTech is used within the banking and finance industry and discuss what objectives these systems aim to address. Activity instructions Review the areas where RegTech is used in finance and banking and contribute to the forum. RegTech for financial institutions Significant business opportunities for RegTech arise from the trade-off between the need to stay compliant with ever-changing regulations and the need to cut costs to remain profitable. Accordingly, most of RegTech today centres around solutions for regulated financial institutions, helping them comply more efficiently and with greater certainty with regulations

and improve risk management, while cutting costs. While the market is still developing, the following areas of RegTech can be identified: Compliance (Slide 1 of 5) This is a broad area representing a significant part of RegTech today. Examples include solutions to cover:  regulatory inventory management: these systems allow firms to identify the scope of regulatory obligations applicable to them  regulatory change management: these systems create workflows whereby regulatory changes are notified to the firm, relevant changes are identified, analysed for impact, and tracked through to implementation  communication surveillance: systems to track all electronic communications for non- compliance (offensive conduct, unauthorised disclosure, IP theft)  compliance levels and compliance risk, based on the analysis of operational and other data (e.g., employee monitoring, historical email analysis, human behaviour analysis, trade communication analysis)  numerous other topic-specific solutions can be found; e.g., for cybersecurity (phishing tests), shareholder disclosure (complying with rules that require companies to disclosure large shareholdings and changes thereto), automated audits, etc. ML / CTF (Slide 2 of 5) AML/CTF is a very complex area that generates a significant need for RegTech solutions. Some of the applications include:  customer due diligence /know your customer rules (starting from the basic identification of the customer, and expanding this to having an overall profile of the customer based on all available information to identify their normal behaviour, risk level and any exceptional activity)  identification of higher risk clients requiring enhanced due diligence  identification of suspicious transactions (and generating the corresponding reporting) by incorporating a wide range of scenarios  identification of cash movements (and associated reporting)  identification of politically exposed persons  identification of terrorism financing transactions (and associated reporting)

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