The business case for Regtech adoption often boils down to one of two primary drivers - increased operational efficiency or enhanced regulatory effectiveness.
It was not a surprise that last month’s Digital Regulatory Reporting (DRR) Phase II report - backed by the Financial Conduct Authority (FCA) and Bank of England (BoE) - indicated the potential of strong operational efficiency benefits from sector-wide adoption of digital reporting solutions for regulation.
The report builds on previous tech sprints and activity related to digitizing of regulation. In particular, the focus was on how to (1) digitize reporting instructions, (2) standardize the description and identification of data, and (3) improve the efficiency of report generation.
What was a delight to read was the depth of the insights they made publicly available. Here are some key takeaways:
1. The burden of regulatory reporting can be quantified by activity.
Surveyed entities attributed the cost of regulatory reporting to the preparation (30% of total) and production (40% of total) of regulatory reports. Other activities such as interpretation, communication, or inquiries scored significantly less.
Firms were also able to classify reporting expenses between ongoing (40%) and change costs (60%) - indicating that most of the regulatory cost is associated with responding to new obligations or requests rather than ongoing ones. Often, these have manual processes associated with them.
2. Digital regulatory reporting has the potential to increase reporting efficiency by 30-40%; however, total benefits vary considerably depending on how it's implemented.
Their research favors incremental steps in the interim and aligning wider adoption as part of new reporting requirements or other major change. Forcing immediate adoption was found to have a 10+ year payback period versus ~3 for the other scenarios.
However, many questions still remain regarding its desirability and how it would be implemented, principally:
Business value: Is the effort involved in setting up a digital reporting regime worth the value considering digital reporting represents an estimated a low 1% of total operating expenses?
Data standards: While open data standards are preferred to encourage competition, what should be done in the absence of one?
Roles and responsibilities: Though the needed roles for adoption were identified, who would ultimately play them and how would they be paid for? Austria provides one model where the Central Bank and largest banks jointly formed a third-party central authority. In Australia, industry is coming together to develop these solutions; in other countries, the regulator is the main actor.
Many of the insights on digital regulatory reporting are transferable to other countries and regulatory regimes.
In the US, for example, we’d likely encounter many of the same questions raised. What is different, however, is that both the benefits and the complexity of adoption in the US would be higher. This is because we have more regulatory actors at both the federal level (OCC, FDIC, Fed, CFPB, NCUA, etc.) and state level. At the same time, we also already have actors like NLMS and FFIEC that are actively working to harmonize data collection.
As the report suggests, incremental changes that encourage automation and harmonization are important. These initiatives build toward a North Star in which both finance and its regulation can be done in machine readable code and transparent algorithms.