How European Banks Are Using RegTech Solutions

Large US and European banks are spending $20 billion a year on technology to help them comply with newly evolving regulations such as MiFID and PSD2. With regulatory environments becoming increasingly complex, 300+ million pages of regulatory documents will be published by 2020 & 600+ legislative initiatives need to be cataloged by a medium-sized, sell-side institution to have a holistic view of their rulebook – the silos of data generated by various business functions lead to significant resource expenditures on data collection, organization, and analysis.

Moreover, between 2008 and 2016, there has been a 500% increase in regulatory changes in developed markets, which has led to 10-15% of the total workforce of FIs working under compliance functions.

Source: Growing Regulatory Complexities – RegTech to the Rescue

Meanwhile, an end-to-end RegTech implementation promises 634% in ROI realizable over a three-year period, which is why a range of financial institutions in Europe are actively exploring partnership opportunities with startups across the use cases we will be reviewing further.

The RegTech adoption strategy differs across various tiers of financial institutions. Some of the large tier-1 institutions have the tendency to take small steps in understanding the ecosystem. They do not often like to go and have strategic relationships with a number of vendors. The mid-tier organizations have a tendency to get into a working relationship with the RegTech providers and then work with their product. Some medium-to-small scale FIs that are always looking out for new innovations and new ways of working, might go straight ahead and implement a vendor’s solution. – Subas Roy, Global Chairman, International RegTech Association (IRTA), for the new RegTech: A Triple Bottom Line Opportunity report.

• Regulatory reporting

One of the most innovative banks, BBVA UK, for example, has opted to use Wolters Kluwer’s OneSumX to provide a solution for its regulatory reporting and liquidity risk requirements.

As a leading global bank BBVA needed a comprehensive solution to ensure its UK regulatory obligations and liquidity risk are managed optimally – Wolters Kluwer provides this, said Marta Garcia, Head of Production Management at BBVA in London.

Latvian ABLV Bank is also using Wolters Kluwer’s OneSumX regulatory reporting software. It is also using the firm’s regulatory tracking and update solution (compliance tracking).

Other banks that are using OneSumX include Mizuho, SBI, BGFI, Taiwan Business Bank, Sberbank, Banco Santander, and Bank BGŻ BNP Paribas.

BNP Paribas is also using fully-digitized MiFID II trade compliance engine for the financial markets – a service provided by Droit Financial Technologies, which expands the ability of financial institutions to comply with the thousands of pages of MiFID II regulations. Goldman Sachs Asset Management has also gone live as the first buy-side client at the end of March. Other clients include CACIB and UBS.

• Compliance

Headquartered in the Netherlands, the Rabobank Group, an international financial services provider with activities in banking, asset management, leasing, insurance and real estate, with operations in 40 countries, serving ~10 million clients, looked to Accuity’s Compliance Link Trade Finance solution. This lack of a common, integral system for vetting trades across the Rabobank Group made it difficult to identify and understand what checks had been made, on which shipments, and when. It was also difficult to track the information and reasoning used in the decision-making process, and not being able to demonstrate these checks and the associated rationale to the regulators was a core concern.

This lack of audit and proof did not correlate with Rabobank’s compliance team’s goal to ensure the bank was meeting all the necessary standards to manage their risk effectively across all parts of the organization. Since implementation, Compliance Link’s Trade Finance Module has been reported to increase operational efficiency, reducing 15-minute checks down to three minutes. By redistributing the workload with a clearer and more efficient process, the compliance team was able to focus on more important tasks, such as expediting trade bids and prioritizing customer satisfaction, while effectively and confidently serving and operating in some of the world’s most complex jurisdictions.

• Governance

International financial institutions are comprised of complex legal entity structures, business models, metrics, and risks associated with it. Corporate governance defines the system by which those entities directed and controlled. Ineffectively controlled organizations risk legal exposure and costs associated with the incomprehensive view of the business and the regulatory environment. The modern financial services industry, largely data-driven, faces challenges originating from poor data governance.

RegTech covers the entire spectrum of governance, risk, and compliance at the organizational level. RegTech solutions enable internal control and accountability for risk data, enhance board’s effectiveness in compliance assessment, allow optimal integration, visualization & consolidation of dashboards, and effective policy and procedure management.

• e-KYC/AML/CFT

BBVA, Spain’s second-largest bank, has implemented Fenergo’s Client Lifecycle Management (CLM) solutions to streamline the onboarding & CLM processes and ensure regulatory compliance across its Corporate & Investment Banking divisions in various jurisdictions – namely Europe, USA, South America, and Asia. A critical part of this solution involves obtaining a single view of BBVA’s clients’ data and documentation.

Fenergo is also used by ABN AMRO, which sought a bank-wide solution to manage the end-to-end client lifecycle process for Client Due Diligence (CDD). The bank is using Fenergo’s CLM solution to provide them with a flexible solution that is future-proofed against evolving regulatory, KYC & AML compliance demands, and changing rules.

We selected Fenergo’s CLM software to enable us to manage the CDD/KYC processes from client onboarding to client off-boarding and all the KYC/CDD compliance and lifecycle events (periodic and event-driven reviews) that occur in between. A core part of our business transformation program will involve creating an internal centralized KYC target operating model that will help us to simultaneously improve the client experience and reduce the cost impact of the regulatory KYC activities. Fenergo is the technology platform that will underpin this initiative. – Helène Erftemeijer, Director (Grid Owner) CDD, Master Admin & Regulations, ABN AMRO

Other banks using the CLM software include RBS, UBS, Santander, and some US institutions. BNP Paribas is also working with Fenergo for its CLM solution for KYC/onboarding.

Fenergo also shares a case study demonstrating the opportunities regulatory and compliance software opens for institutions: for Fenergo’s global investment banking client, the KYC client review process was manual, and highly inefficient, culminating in thousands of hours of interactive (fully engaged) time to complete. In fact, the company reports that it took on average 27 hours to complete the KYC review process for one medium-risk client. And that calculation did not even include additional elapsed time for review, the time it takes for clients to respond to the financial institution’s request for additional or updated data and documentation. With 2,500 to 3,000 clients classified as ‘medium risk,’ it meant that the KYC client review process for medium-risk clients took between 67,000 to 81,000 hours to complete for that client.

The most interesting part comes after the implementation of Fenergo’s rules-based workflow platform, which supported the end-to-end cycle time for KYC remediation case handling. The software implementation resulted in a 37% improvement in case handling time and efficiencies for the medium client risk category alone. This reduced average handling time for each case down from 27 hours each to 16.47 hours, shaving off a cumulative average of 27,380 hours in total for the medium risk client category for the investment banking client.

• Data management

Seeking to manage operational risk and controls efficiently, HypoVereinsbank is working with IBM to streamline processes, boost data quality, and increase productivity. The bank can assess and report on risks and controls more accurately, identify areas for improvement more easily, and achieve time savings through automation.

HypoVereinsbank uses IBM OpenPages Governance, Risk, and Compliance (GRC). The bank uses IBM OpenPages GRC to evaluate its controls along processes across all departments. To enable more comprehensive risk and control management reporting, the bank established connections between risks and controls that it can report on at different levels of granularity, depending on the audience.

We have a robust set of risk and control management procedures in place. To ensure that operations always comply with these policies, we perform internal audits of all process controls once a year, examining around 3,000 controls across various processes each time, Armin Konetschny, Head of Process Architecture and Control Management at HypoVereinsbank, explained.

The bank saw a 33% reduction in personnel requirements thanks to better use of existing resources and was able to obtain insight into risks and controls to identify gaps and resolve glitches quickly.

• Fraud monitoring & control

ThetaRay, a big data analytics solutions provider, works with ING Netherlands, which implemented its Advanced Analytics Solution for fraud detection. The combination of ThetaRay’s technology with ING’s standing risk engine enables the bank to detect new instances of SME lending fraud hidden within massive amounts of transactional and organizational data – in real-time and with industry-low false positives.

• Digital identity

There are already examples of institutions using RegTech to help improve their compliance processes. Hitachi shares that Dutch multi-national banking company Rabobank is using RegTech in the form of its digital identity scheme, called Rabo eBusiness, to help verify people are who they claim to be.

This means a financial service provider can offer a familiar identity experience and a smooth checkout that balances the user experience and security requirements, said Alexander Zwart, Former Senior Product Manager – Online channels & Access, Rabobank, and currently Head of Digital Channels & CX at Digital Transformation Office at Rabobank.

• Risk management

BNP Paribas is using Wolters Kluwer’s OneSumX’s solution that was mentioned earlier for automating their risk management operations. Russian Sberbank is also using the same solution to streamline its treasury operations with capabilities such as dynamic simulation, market risk analysis, and liquidity risk analysis.

Back in 2014, Societe Generale set up a centralized credit valuation adjustment (CVA) desk that uses IBM simulation engines and risk analytics to support every line of business with accurate, automated, real-time pricing of CVA for standard products.

To go even further, Societe Generale realized the potential of CVA and similar measures to give its traders real-time insight into counterparty credit risk, helping them identify trades that would reduce the bank’s overall exposure – and offer more competitive pricing to low-risk counterparties. To achieve this, traders would need to be able to access accurate CVA pricing at the touch of a button with the response time of just a few seconds. Working with IBM, the bank created a centralized CVA desk solution powerful enough to perform millions of simulations to automate the pricing of each of its standard products as well as making it flexible enough to price more exotic trades. As a result, Societe Generale has been able to improve its capital consumption and significantly reduce its Basel III capital requirements.

Reviewed cases and examples are certainly not exhaustive for the functional potential for risk, governance, and compliance software. Opportunities for financial services institutions to leverage RegTech for compliance include but are not limited to technology-enabled process efficiencies, data sharing & aggregation, data-driven insights generation, platform development, which includes compliance over cloud and blockchain-based platforms for compliance, and on-demand compliance expertise.

For financial institutions to be able to fully harness obvious and proven benefits of software adoption for risk, governance, and compliance functions, investments in regulatory technology cannot be seen purely as an extra weight in expenses. Numerous case studies prove adoption of RegTech solutions to bring immediate or short-term positive implications on operational efficiency at the least, and significant reduction of the cost of resources deployed for supporting the compliance and risk management functions.

“We believe the move towards a more data-driven and granular approach to supervision will improve scrutiny of the financial sector and help ensure better outcomes for market participants and consumers. The use of RegTech is an important tool in supporting that process.” – Patrick Armstrong, Senior Officer, Financial Innovation, ESMA, said.

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