How digital automation can help offset Australia’s 492 per cent regulation boom (and restore a little trust)

November 23, 2016

Damage control does not come cheap.

 
Just ask Dongjin Koh, President of Mobile at Samsung Electronics.
 
Koh told press in October this year that the total recall of the inflammable Galaxy Note 7 range - based on reports of just under 50 exploding units of the 2.5 million shipped products - would cost the Korean conglomerate a “heartbreaking amount”. 
 
Or to be more precise, more than $5 billion, Samsung later admitted.
 
But, according to Chang Sea Jin, National University of Singapore business school professor, the multi-billion dollar Note 7 recall cost was worth it.
 
“The potential damage to reputation is far greater than short-term financial losses,” Professor Jin told Bloomberg.
 
Samsung’s relatively quick action to hose down its product fire may save the brand from further tarnish while capping bottom-line costs.
 
However, some reputational repair bills are far less easily contained.
 
The global financial services industry, for example, has been handed an ever-escalating annual impost following the massive ‘brand’ damage it suffered during the GFC.
 
Mostly, that trust repair expense has been wrapped up in the compliance departments of financial firms around the world, which have expanded along with an increasing stack of regulations.
 
Australia’s ‘staggering’ 492 per cent regulation boom
 
In a speech to an Australian fintech gathering this November, Treasurer Scott Morrison put the estimated annual compliance price for the global financial industry at more than US$70 billion, with the price of regulatory compliance and governance software set to soar to US$120 billion by 2020.
 
“It is estimated that from the 2008 financial crisis through 2015, the annual volume of regulatory publications, changes, and announcements increased a staggering 492 per cent,” Morrison said.
 
While the regulation boom may have been an understandable reaction, neither the industry nor consumers would be particularly pleased with the outcomes to date.
 
Our compulsive-obsessive regulatory disorder has added complexity and expense to most financial services interactions while doing little to restore fundamental public trust in the industry.
 
So how should we rein in regulatory inflation without popping what remains of the consumer confidence in financial services?
 
Technology, of course, offers some promising solutions. To date, though, most of the so-called fintech revolution has been aimed at streamlining, or disrupting, regular business activities rather than building a coherent, seamless compliance process.
 
Tellingly, Treasurer Morrison called for a greater focus on regulation technology – or RegTech in the inevitable abbreviated form – to meet this burning need.
 
“In this digital and online environment RegTech can provide enhanced regulatory compliance by building it into an organisation's key business practices and operations,” he said in the speech.
 
Morrison said by adopting an embedded “compliance by design” approach, financial services businesses could use RegTech to both lower compliance costs and reduce risks.
 
“… when successfully implemented, 'compliance by design' can increase the confidence of regulators, consumers and the community in the activities and behaviour of Australia's financial institutions,” he said.
 
A RegTech revolution for financial planning software
 
For financial planning software - one of the most-maligned sectors of the broader Australian finance industry – RegTech could prove particularly revolutionary.
 
Yet for that to happen, the advice industry must lift its technology game.
 
Today’s consumers want to access their financial information on their smart phones: everything from tracking their goals, cashflow (spending and savings), portfolio management, banking, mortgage, insurance and advice strategies.
 
However, most of our regulatory compliance systems are built on legacy technology that does not mesh well with the advice process or client-level access points.
 
We need device-agnostic technology that automatically monitors the suitability, quality and compliance levels of financial advice. A smart statement of advice (SOA) platform built on RegTech principles that can check for inconsistencies across multiple parameters without the need for human intervention. RegTech-backed advice technology has the capability of lowering error rates, potentially eliminating disputes whilst also improving client protection and their underlying advice experience.
 
In order to fully achieve these revolutionary goals both industry and regulators must agree on what compliant advice looks like in a RegTech world.
 
If consumers can see their SOA had been ‘rated’ or ‘stamped’ as compliant with industry standards, based on thoroughly-tested RegTech processes, then perhaps confidence in the advice industry itself might be restored.
 
Reputation-enhancement, in the long-run, offers a far cheaper solution than damage control.

Jacqui Henderson