Technology and regulation must go hand in hand for financial services

By Henry Balani, Global Head of Industry & Regulatory Affairs at Encompass Corporation

In recent months, we have seen a major focus on regulation, with the Autumn Statement, global sanctions developments and, most recently, the Edinburgh Reforms – with an emphasis on reducing red tape to fuel the growth of the UK’s financial sector – making the headlines.

Whilst regulation has a crucial role to play in shaping and protecting the industry’s future, with a robust environment imperative, it is more important than ever that financial institutions also focus on utilising the best in technology and innovation to not only ensure compliance with evolving regulatory requirements but also power both business growth and that of the industry as a leading global hub.

Effective compliance results in better, more informed business decisions. Central to achieving this is putting sound Know Your Customer (KYC) processes in place. When supported by technology, these are faster, frictionless and improve customer experience, leading to business wins and, ultimately, profit.

Digital transformation should, therefore, be at the top of the agenda going forward, supporting ongoing regulatory reforms by strengthening the accuracy and efficiency of compliance, thus helping the proposed agile framework to flourish, and enabling businesses to truly thrive.

‘The world’s next Silicon Valley’

In the Autumn Statement, the Chancellor of the Exchequer, Jeremy Hunt, set out an aim to turn the UK into “the world’s next Silicon Valley”, using its enviable technology, innovation and ecosystem to turbocharge the economy.

The Chancellor also outlined the importance of protecting the government’s research and development budget, whilst suggesting an increase to £20 billion by 2024-25. He also placed an emphasis on sustaining investment zones across the country to build growth clusters, hinting at further announcements in the Spring Budget.

Becoming the next Silicon Valley is an ambitious but not entirely unreasonable goal. It requires an opportunistic-minded ecosystem, willing to take investment risks within a framework that provides transparency and clarity within a ‘rule of law’ environment.

Beyond the ecosystem, banks and financial services organisations will need to embrace digital transformation by overhauling legacy infrastructure.

This is particularly pertinent given the ever-changing EU regulatory landscape, as banks need to ensure they can adapt and react swiftly to comply with developments, and the UK works to refine its own regulatory framework to make it more agile considering market requirements.

This cannot, though, be at the expense of bolstering innovation. Regulations serve a valuable role in providing the framework to effectively function within the financial services sector and, as such, as the UK continues to modify existing regulations, the balance between encouraging innovation and economic growth while ensuring public and investment communities are adequately protected should be considered.

KYC digital transformation

To succeed, businesses should overhaul their internal infrastructures, trusting in the best-of-breed technology at their disposal. Taking KYC due diligence as a primary example, current manual processes are simply not as effective as they could be. KYC can involve hundreds of analysts who need to access external sources of information to identify ultimate beneficial owners (UBOs), establish corporate hierarchies, screen for politically exposed persons (PEPs) and cross-check sanctions lists. Performed manually, this is often slow, error-prone, and expensive.

To achieve real, sustainable growth that aligns with the UK’s ambitions, financial services institutions need to level up by equipping themselves with state-of-the-art cloud technology, powered by automation.

Embarking on a KYC transformation journey can provide leaders with the insights needed to facilitate better decisions, reduce the burden of manual tasks, and improve compliance oversight.

Looking specifically at risk and reputation, technology not only offers a level of control but also the reassurance that processes are being followed consistently and correctly. This means those involved do not face the same risks of falling foul of the consequences of non-compliance.

This form of transformation can also have a significant impact on people. Thanks to quicker, more efficient procedures, customer satisfaction is greatly improved, impacting overall trajectory for the better. Meanwhile, internally, staff are freed up to concentrate on the tasks that most require human intervention and expertise.

It must be remembered that KYC processes are developed with regulations in mind to ensure compliance with current requirements. As such, as the UK government reviews regulations, processes will naturally be transformed, potentially to encourage innovation.

Technology and regulation go hand in hand

As mentioned, throughout the government’s proposed reforms, regulation takes centre stage, with removing red tape for the good of businesses being a main objective.

Measures such as reforming the ring-fencing regime for banks and issuing new remit letters for The Prudential Regulation Authority (PRA) and The Financial Conduct Authority (FCA) have been put in place to boost international competitiveness and reduce background work for UK banks, by removing blanket geographical restrictions, for example.

Whilst these bodies also play a key role in upholding the highest regulatory standards across the industry, which is crucial to tackling financial crime, it is important that this does not hinder attempts to better productivity, which is where innovation remains key.

As explained, digital transformation across the financial sector is vital if organisations are to not only remain competitive and agile but also grow, especially amidst ongoing regulatory changes.

As they look to the future, financial institutions should take full advantage of the benefits of regulatory technology solutions to see tangible outcomes, and the industry, including regulators, must fully support innovation.