RegTech and Legacy - the path to better adoptionRob McPherson
There are many benefits of using RegTech for the financial services industry, but there are also barriers that need to be overcome in order to make it successful. At the recent Regtech Automation and Compliance forum in London a major theme discussed was legacy system integration.
What can financial institutions, vendors and regulators do to ensure different types of technologies work together to enable the potential of RegTech to be realised?
First, let’s look at why financial institutions are adopting RegTech in the first place. Generally, firms that adopt RegTech are nimble, innovative and can swiftly solve existing problems, providing competitive advantage. They can automate manual processes, reduce errors, and have quicker access to accurate consolidated data and new insights.
Barriers to adoption
There are some RegTech solutions that can be deployed rapidly, such as identity verification. However, compliance and reporting tools require deeper integration and careful planning, including testing and roll-out strategies.
The adoption of innovative new RegTech solutions is not without challenges and the process of integrating them with existing technology and business processes generates its own issues:
- Cross-business collaboration
Different business lines have varying standards for data management, security procedures and reporting standards. RegTech solutions usually span across business lines and implementation requires high-level strategic thinking, stakeholder buy-in and effective collaboration for it to be successful.
- Saturated RegTech market
A common concern from firms is that because there is such a wide variety of RegTech solutions that serve similar purposes, it can be hard to see the wood for the trees. Firms struggle to decide which solution will provide a best fit to their specific requirements now and in the future.
- Silo solutions
Many RegTech solutions have been created to address one specific business requirement or problem, but businesses have many separate problems to resolve within regulatory compliance and this leads to many different tools being implemented. With multiple solutions, multiple integrations are required, which can result in excessive maintenance.
This takes us on to one of the key challenges: integrating with legacy technology.
Many firms are reliant on operational systems that are built on older technology, which carries its own operational and integration challenges. The data required to populate RegTech tooling often originates or is processed by these systems.
Things become difficult when changes are required to these systems, such as capturing, extracting and processing additional data fields required for regulatory reporting. The timescales for development and testing of legacy systems combined with the cost of implementing changes can be prohibitive.
For many firms, it’s not a realistic option to re-write legacy systems within the short or even medium-term to allow for better integration with RegTech, so other strategies are required to solve this.
Addressing the challenges
To enable easier integration of RegTech, there is a need for firms, vendors and the regulator to take steps to drive better adoption.
- The Regulator
Regulators can help by providing better standardisation and common frameworks. For example, clear standards for APIs, reference frameworks and the provision of a common data dictionary. This would allow RegTech products to use standardised components and identifiable terms, enabling better understanding within the market.
Better standards will drive greater confidence in firms leading the adoption of RegTech. When taking on new technology, firms are rightly cautious about being tied into a proprietary platform that locks them in. But with clear standards, a more open RegTech marketplace can evolve, where firms have the choice of which products to plug in and have the option to switch vendors if desired.
Regulators themselves are moving to digital methods to deliver regulatory requirements and thus have an incentive to assist both vendors and firms in using shared integration methods.
In the UK, the FCA have piloted Digital Regulatory Reporting (DRR) with the aim of reducing manual efforts required from all parties and to improve the accuracy of reporting. The Philippines Regulator (BSP) has also trialled this model and other regulators are likely to follow suit.
- RegTech Vendors
RegTech vendors have shown that they can produce innovative solutions rapidly to meet specific use cases. While this speeds up entry to the market, it also leads to a fragmented picture where many different products are often required to meet the entirety of one regulation.
In the short term, better standardisation among RegTech solutions and the use of common data terms could lead to greater harmonisation between vendors making it easier to share data across solutions. At present, many RegTech applications exist in their own silos with useful data and insights not fully exploited.
RegTech vendors can also look to provide more holistic solutions that offer broader functionality. Solutions could be focused around the ability to meet multiple regulations simultaneously with a centralised approach to integrating client data. Some vendors are taking steps in this direction and are moving to a platform-based model rather than single-point solutions.
- Financial Institutions
The main challenge sitting on the side of financial institutions is how to integrate RegTech with existing legacy applications.
For traditional firms this is a significant challenge, but it is not insurmountable. The key is creating an architecture that enables data to be exposed via technology such as microservices to enable integration around the edges of legacy applications with minimal disruption to the core solution.
Data from legacy systems, once accessed via APIs, can then be consolidated centrally and used to populate multiple RegTech solutions as required.
Firms should look to employ consistent standards for managing and governing data as this enables users to understand data from disparate sources. It also allows for easier adoption of new tooling and future data requirements.
In a nutshell
Financial institutions have to adopt RegTech for a strategic edge. The business case is strong, particularly within regulatory compliance and reporting areas. Manual processing, data validation and workflows can be automated, delivering significant time and cost-savings while providing more accurate results.
Vendors, firms and the regulator are all making progress on the journey to greater adoption, but a move to standardised frameworks for RegTech will certainly speed up the process and build confidence. Financial services firms still have a challenge with integration but with the correct technology strategy they can successful embed RegTech into their ecosystems.
At Credera, we support clients with building the technology strategy required to enable the successful adoption of RegTech solutions. We use our technology expertise within automation, data extraction and microservices technology to accelerate transformation in a controlled and sustainable manner.