Report urges regulators to embrace innovation

A new report from PA Consulting has revealed that financial services firms expect to lose business and revenue if regulators do not embrace innovation and evolve with technology trends.

The consultancy questioned 500 directors with responsibility for compliance and regulation issues in UK organisations, along with 2,002 consumers.

It found that 92 per cent of businesses said that if regulators in their sector fail to evolve - in areas like processes, technology, manpower and culture - they expect to feel a negative impact within three years. Expected revenue loss was put at eight per cent on average.

Additionally, 95 per cent of organisations expect at least some business activity or revenue to be lost to new or disruptive businesses in the next five years. Across sectors, this is expected to represent 20 per cent.

Most organisations do still see regulators as enabling innovation (45 per cent) as opposed to blocking it (26 per cent). Over the next five years, most want regulators to retain an enabling role, with nearly a third looking for regulators to drive innovation (31 per cent). That is particularly true in the financial services sector (20 to 30 per cent).

Conrad Thompson, business transformation director at PA Consulting, warned that regulators cannot afford to be complacent. “They need to be more comfortable with trying new approaches and techniques and being agents of change rather than burdens in their industries,” he commented. “More than ever, they need to be prepared to take risks and occasionally admit to past mistakes.”

The report found that UK regulators are lagging behind other international regulatory bodies in their own use of technology.

Regulators collect vast amounts of data but don’t always use it as well as they could, stated PA Consulting. Applying technology solutions like machine learning to this so-called ‘dark data’ - unstructured data that is collected but not analysed - could enable regulators to start to predict future events and become increasingly proactive.

For example, machine learning is already being used to monitor market chatter like social media to highlight compliance risks, and semantic text analysis can create usable insights from large stores of unstructured information.

At the moment, regulators may be stuck in silos, processing information manually. “Unless regulators act urgently to deploy new technology that improves efficiency and compliance, reduces the burden on businesses and better protects the consumer, they will find themselves quickly relegated to obscurity,” the report read.

Regulators need to balance shifting their approach with consumers’ appetite for them to be actively punishing businesses who step out of line, according to the report. The survey showed that 72 per cent of consumers think that regulators should fine and prosecute businesses more often. Many believe that they should focus on persistent small offenders just as much as bigger organisations. Communicating impact, not just activity, would help, PA Consulting noted.

Future regulators will also need to be more explicit about who they’re getting back into line, but also who is doing well.

Around two-thirds of regulated businesses (62 per cent) said regulators could show they were trustworthy by communicating their purpose and role more clearly. Other than employing industry experts, this was the most important way for regulators to build trust.

The report cited the Monetary Authority of Singapore (MAS) as a regulator focusing on using technology better to detect fraud and protect consumers more effectively, along with automating its own processes to make it easier for firms to interact with it.

MAS has put in place a data analytics and pattern recognition system, to study trading behaviour and detect accounts that may be acting in concert to manipulate share prices, or engaging in circular trading to create a false impression of market interest. It is also working on a data analytics system to scour through the 3,000 suspicious transaction reports that financial institutions file each month on money laundering or terrorist financing risks.

Thompson concluded that data and insight make it easier to engage with consumers. “But as we head into uncharted territory, regulators will need to keep up with the challenges of regulating artificial intelligence, blockchain and vast analytics.”

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