The Emergence of SupTech — Supervisory Tech for Regulators

Over the last ten years, regulators have demanded more information and tougher compliance requirements from the organizations they oversee. Whether it’s the 2008 financial crisis, the Panama Papers or AML lapses, there is a deep imperative for regulators to ensure that obliged entities are meeting the standards enshrined in laws. Along with more regulation and more reporting comes the need for a more transparent, tech and data-driven approaches to report and monitor activities with reduced risk and errors. To serve this need, a new field is developing, SupTech, which is short for supervisory technology.

SupTech is technology for the regulators themselves. As with other RegTech, it’s about improving efficiency through the use of automation, introducing new capabilities and streamlining workflows. By digitizing data and allowing the power of computer algorithms to run checks, keep tabs and systemize the processes, SupTech can enable better reporting, oversight and overall compliance on the regulator’s side.

The industry is under significant pressure as it has to deal with numerous new regulations, the threat of significant fines and the high overall costs of compliance.

  • The last ten years has seen a 500% increase in regulatory changes in the developed markets
  • Banks are spending $270 billion per year on compliance and regulatory obligations
  • Fines levied on banks by US and UK regulators will top $400 billion by 2020

Regulators understand these considerations but they have their mandate to fulfill; they need to ensure laws are followed. However, if they can create systems that lessen the burden on regulated entities while improving their performance, it’s a win-win for all parties.

For regulators, a major consideration is how well they are preventing non-compliance or catching it if it does occur. How many cases can they look at? How deep can they dive into the data? How quickly can they spot problems? Costs are always a consideration; are they optimizing staff’s time and getting the most productivity from them?

Regulatory Workflows

Gathering and analyzing data — generating and communicating various account, transaction, activity and analysis reports — is the lifeblood of regulators. Currently, many of these procedures are manually processed, making for excessively cumbersome, error-prone work.

Additionally, there are different data and reporting formats and standards for different sectors/companies/divisions/units, making analysis more difficult, costly and time-consuming.

By automating and standardizing data reporting channels, the workflows are quicker, less prone to data entry errors and easier to analyze. The regulatory professionals are better able to spot patterns that point to problems and their work becomes less rote, as they can focus on the bigger picture, not data collection. Standardized data also enables better machine analysis. Advances in data analytic tools and processes enable a whole new level of analysis, spotting more problems, quicker.

Regulatory Innovation

Regulatory compliance is necessary is to achieve societal needs; to prevent fraud, corruption, market manipulation, tax evasion and various other imperatives to ensure fair and safe financial activities. To this end, SupTech is about adopting new technologies and processes that help meet these goals.

One goal that is often cited by developing nations is financial inclusion, getting the 1.1 billion unbanked individuals at least a basic bank account. On a practical note, how can success to this laudable goal be measured? In Rwanda, the National Bank (their Central Bank) is implementing an electronic data warehouse (EDW) system to improve the reporting system from the entities they have oversight on. In addition to improving workflows it enables the reporting of much deeper information, while not burdening the entities. Critical information for measuring financial inclusion progress is easily added to other reports, improving insight adding to the effectiveness of programs.

As with fintech and RegTech, there’s a whole host of new technologies that to explore and could offer value. APIs could plug new capabilities quickly into the regulatory stack. Cloud systems could enable secure distribution of information across multiple regulators. Distributed ledger technologies could setup models for transparency and accountability that are immutable. Predictive analytics and automated decision-making can leverage AI to extend the reach of regulators.

Real-Time Regulation

Real-time inputs and smart monitoring systems portends a potential future where compliance reports are dynamically generated and flagged (if necessary) almost instantaneously. While this might be overkill for the majority of activity, with the size, speed and interconnectedness of modern economies this level of oversight can provide deep value:

Remember that the inability to correctly measure and analyze the risks associated [with] banking activity was one of the reasons [for] the current financial crisis. Developing and communicating accurate and timely statistics is essential for avoiding the repetition of this failure in the future.”
- Danièle Nouy, Chair of the Supervisory Board of the SSM (Single Supervisory Mechanism)

How the technology actually progresses is up in the air. Who controls the technology? What standards will gain acceptance? What level of reporting is necessary? How will security be protected? These and other questions will require careful consideration and planning now, before it’s all rolled-out.

As fintech and RegTech develops, it’s imperative that SupTech advances in tandem. Otherwise, it’d be a hinderance to progress and rein in all the advantages the technology offers. Even worse, without advancing technology, regulators will be at an extreme disadvantage to those who continue to engage in illicit activities.

It’s in the interest of all parties — technology providers, regulated entities and regulators — to come together to build robust, cost-effective, and secure compliance reporting systems. SupTech is a step-forward to building fair and trustable compliance systems and its development will have wide-ranging consequences for everyone in compliance.