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Review of The RegTech Book article, 'RegTech and the Science of Regulation'

The REGTECH Book: The Financial Technology Handbook for Investors, Entrepreneurs and Visionaries in Regulation, Wiley August 2019.  Authors: Janos Barberis, Douglas W. Arner, Ross P. Buckley. Amazon link

My print copy of the long awaited RegTech book ships from Amazon next week and promises to be a comprehensive resource, crowdsourced from more than sixty leading compliance practitioners, banking regulators, and technology entrepreneurs.

What is RegTech anyway? Regulatory technology (RegTech) provides gains in efficiency for compliance and reporting functions whilst also holding the potential to fundamentally change market structure and supervision. The book is a resource that offers an essential guide to the disruption, innovation, and opportunities of technology in the regulatory and compliance sector.

The chapter structure looks more like a reference work than something to read from cover to cover, although if you are new to the regulatory World, it will serve as a wonderful primer.

1. Introduction

2. The RegTech Landscape

3. Regulatory Innovation and Sandboxes

4. A Call for Innovation or Disruption?

5. RegTech Investment and Compliance Spending

6. RegTech for Authorized Institutions

7. RegTech from a Regulatory Perspective

8. Blockchain and AI in RegTech

9. RegTech Applicability Outside the Financial Services Industry

10. Social Impact and Regulation

11. The Future of RegTech

The rest of this article reviews Shirish Netke’s contribution to the RegTech Landscape chapter, entitled, “RegTech and the Science of Regulation”. 

Mr. Netke is an entrepreneur and technologist whom I’ve known since the Sun ICON days back in the early 1990’s. I’ve known about his interest in regulatory compliance and systems to detect money laundering for the past 3-years. Today, his company Amberoon and their AML solution, Lucre, are on the leading edge of technologies that are set to transform the way AML/BSA compliance is done around the world.

His article opens with a powerful metaphor from the film “Minority Report”, where the hero, John Anderson, played by Tom Cruise, head of pre-crime, arrests a man for murder – a crime he planned to commit later that day. The premise of the story being that, the future could be seen with enough certainty to arrest someone before they commit the crime.

Although the movie is science fiction, Mr. Netke suggests that with the state of computer science, that future is not far away in banking compliance.

Legacy Approaches to AML/BSA Compliance.

 With only around 1% intercepted of the illicit $2-4Trillion laundered globally, the outcomes of the current approach to AML compliance are abysmal and frustrating for both regulators and practitioners. False-positive alerts typically exceed 90% in most banks and many practitioners complain that the same names keep appearing in alerts even though they are low risk customers. The root-cause of the problems and frustration can be traced back to legacy AML systems that extract reports from historical systems of record.

These systems may be effective in measuring, monitoring and running a bank, but they do not provide insights into the risks associated with today’s banking environment.

RegTech and Modern Technology

 Mr. Netke quotes a statistic from a Bain and Co report entitled “Banking RegTechs to the Rescue” that estimates the costs for governance risk and compliance (GRC), account for 40% of banks budgets for building new systems.

The foundation for future advanced-systems of insight that enable banks to manage their operational risk lie in modern technologies, including predictive-analytics, big-data systems and machine-learning. The Bain article suggests that where legacy systems required up to $10M and 2 years to implement, new systems can be implemented for $300,000 in three-months and deliver greater insight.

Human Factors 

The rate of adoption of RegTech will be dictated by the people responsible for implementing operation change within the bank. RegTech has the potential to increase compliance-team productivity by 100% and provide far greater insight into operational risk.

Mr. Netke does not advocate for an AML system without people; indeed, he believes that the answer to using technology in financial services is with a judicious combination of human intelligence and machine intelligence.

The Future - Preparing for RegTech

Mr. Netke concludes his article with the belief that regulation is essential to the future of banking to address risk management and the function of an efficient and effective market, where customer funds are protected. The future consists of emerging technology solutions that help banks make better risk decisions at lower cost and in compliance with regulations.

The emerging technologies of cognitive analytics, big data systems, machine learning and predictive analytics are the enablers. These technologies did not exist 10-years ago. The future of RegTech will hinge on a partnership between regulators, practitioners and technologists to define an effective new compliance eco-system that benefits all participants and has the potential to identify bad actors and intervene before a money laundering crime is committed.

 

 

Shirish Netke
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