In Re (#12 December 2018)

Smarter Bank Compliance and Regulation: What about Ukraine?

by Oleg Krainskyi

Similar to any other process in finance that requires human input, bank compliance, regulation, and oversight can and should be assisted by technology to enhance efficiency, increase capabilities and cut costs. Bringing man and machine together in these areas goes under the name regtech for those solutions that help finance business to manage compliance and suptech for those solutions that help regulators to look after exactly how well finance business is managing compliance. While not booming quite as much as the broader fintech narrative, both regtech and suptech have been hot topics in the tech community in recent years. However, in Ukraine, those developments have gone almost unnoticed so far.

The tech agenda of the National Bank of Ukraine (NBU) and other financial market supervisory agencies becomes surprisingly shy when it comes to regulatory technologies. Likewise, both NBU annual reports and periodic publications describing activities and plans of other stakeholders are short of details on any technological developments.

In this article, we will look broadly at where world regulators and financial firms stand in terms of digitising bank compliance and regulation. We will then try to compare global trends to the tech market climate in Ukraine, and identify the themes that Ukrainian regulators might want to explore moving forward.

How tech is changing bank compliance and regulation

The running costs of compliance and potential risks associated with failure to meet the regulatory requirements is a well-known problem in global banking. While it is believed that by now the market has reached the peak of the regulatory tightening which followed the global financial crisis1, it is estimated that between 10% and 15% of employees are still focused on compliance and risk management in world banking2. Globally, this translates into approximately USD 780billion that the financial industry spends annually on keeping up with regulations3.

At the same time, a body of new regulations is being drawn up in response to digital transformation on the market, which has been notably gaining traction. MiFID II / MiFIR, followed by PSD2, GDPR, and AMLD5 in the EU is an illustrative example of such new regulation posing a new set of compliance challenges for participants of the financial market.

Against that backdrop, financial firms are exploring ways of streamlining their regulatory compliance policies and practices4. One of the most meaningful ways to do this is by incorporating technology to help or, in some instances, even take over the processes that have long remained primarily reliant on human experts.

For example, machine-assisted (partially automated) regulatory reporting is one of the most promising technologies currently being developed in the regtech market. However, potential use cases for more advanced technologies are also being discussed, such as ML-powered algorithms to process KYC (know your customer) data or monitor financial transactions to manage anti-money laundering risks.

New questions and concerns are encroaching on the supervisory agenda too, as the majority of banks around the world are reportedly developing and implementing comprehensive digital transformation programmes5. This is being done alongside the expansion of the financial services market itself, since incumbent banks and fintechs entering the market are constantly rolling out new tech-enabled products that are not always adequately regulated, including not only from the perspective of prudential supervision but with regard to data protection and AML as well.

How this has influenced the regulatory priorities can be observed at the highest international levels. For example, the Basel Committee (BCBS) notes that the same technologies that offer benefits to fintech firms and banks (among others, AI, ML, advanced data analytics, and cloud computing) may also have the potential to improve supervisory efficiency and effectiveness. Bank supervisors assessing and trying out the potential of new technologies could, in BCBS view, enhance the safety, soundness, and stability of the global financial system6. More recently, the IMF / World Bank Bali Fintech Agenda points out that fintech innovations could help central banks to improve their services, as well as facilitate and strengthen AML compliance7.

Many key regulatory agencies around the world are actively exploring ways of using various technologies in carrying out their mandates. This is done both (1) by instituting dedicated internal departments to work on tech, which has recently been done, for example, by the Monetary Authority of Singapore8 and the Bank of Italy9, and (2) by exploring prospects for specific technologies and new ways to deliver regulation.

The latter is often done using in-house capacities of a regulatory agency to research market needs and produce appropriate regulatory response. For example, the UK Financial Conduct Authority (FCA)10 and the Bank of Russia (CBR)11 have recently been consulting market participants on their views regarding regtech developments and the respective regulatory policy. Similarly, US self-regulatory body Financial Industry Regulatory Authority (FINRA) recently asked the market to provide comments on areas where additional guidance or resources may be desirable to support the adoption of regtech solutions12.

However, there are also at least several success stories of regtech breakthroughs achieved in cooperation between a central bank and market participants. For example, in 2013, the National Bank of Austria (OeNB) partnered with the nations largest banking group to create a platform for streamlined sharing of regulatory data between the OeNB and supervised firms. The platform, which is managed by an intermediary company called Austrian Reporting Services GmbH (AuRep), has so far allowed for an estimated 30% reduction in the cost of regulatory compliance in Austria13.

In another case, the National Bank of Rwanda (BNR) has teamed up with business intelligence and analytics company Sunoida Solutions to develop a system called electronic data warehouse (EDW), which went live in mid-201714. EDW enables the BNR to pull the data it needs directly from the IT systems of its over 600 supervised financial institutions, subject to appropriate data protection, quality, and integrity rules built into the system15.

A place for tech in Ukraines regulatory priorities

Compared to the progress of world financial market regulators noted above, supervisors in Ukraine seem to prefer observing the way tech transforms the financial market rather than spearheading that process.

So far, there has been very little public communication describing the views of the NBU or other local regulatory agencies, even on the general fintech market in Ukraine, let alone specific points on regtech or suptech.

One of the few examples is the Comprehensive Programme for Financial Sector Development in Ukraine until 2020, approved by the NBU in 2015 and revised in 2017. This has a general commitment to support the deployment of innovative IT by participants of the financial services market. That commitment includes, for example, setting up common storage for data produced by each financial services market regulator in Ukraine, developing and implementing new data disclosure and quality check mechanisms, and establishing an information exchange system housed by the NBU to fight cybercrime in the Ukrainian banking sector.16

However, that general commitment is subject to a nearing deadline set at 31 December 2018 and only limited progress has been made so far. For example, the NBU recently announced expansion of its BankID system enabling remote identification of bank customers in the course of onboarding KYC17. Apart from that, both the NBU and other regulatory agencies have chosen to remain mostly silent on tech issues.

Of course, it cannot be fairly expected that the NBU or other regulatory agencies would be active on the tech agenda earlier than the new technologies becoming widely adopted on the regulated market. However, with the emerging fintech market in Ukraine poised for growth in 2019 and going forward, it is probably the right time for Ukrainian regulators to take a more active role in supporting and promoting the advancement of technology, including through their own lead.

Oleg Krainskyi
is an associate at AVELLUM

1 Ernst & Young, Global Banking Outlook 2018.

2 Oliver Wyman, Regtech on the Rise: Transforming Compliance and Competitive Advantage, 2018.

3 Financial Times, Differences in Financial Regulation Cost Business $780bn annually, 12 April 2018.

4 See Freshfields, What theyre saying about fintech at the worlds biggest tech conference, 19 November 2018.

5 See Ernst & Young above.

6 BCBS, Sound Practices: Implications of Fintech Developments for Banks and Bank Supervisors, February 2018.

7 IMF / World Bank, The Bali Fintech Agenda, October 2018.

8 See MAS media release dated 13 February 2017.

9 See Bank of Italy, Harnessing Big Data & Machine Learning Technologies for Central Banks. Opening Remarks by the Deputy Governor of the Bank of Italy Fabio Panetta, 26 March 2018.

10 On 17 October 2018, the FCA issued a feedback statement in response to the call for input it published earlier in 2018.

11 In October 2018, the Bank of Russia has also issued a public consultation report describing prospective regtech and suptech technologies and asking market participants to share their views.

12 See FINRA, Technology Based Innovations for Regulatory Compliance (RegTech) in the Securities Industry, September 2018.

13 See Bank of Russia above citing data from Bearing Point.

14 See World Bank blog, Leveraging Suptech for Financial Inclusion in Rwanda, 6 August 2017.

15 See Dirk Broeders, Jermy Prenio, Innovative Technology in Financial Supervision (Suptech) The Experience of Early Users, Financial Stability Institute, FSI Insights on Policy Implementation No. 9, July 2018.

16 See Commitment B. 13 in the Programme.

17 See NBU, NBU Expands Options for Remote Identification of Individuals via NBU BankID System, 9 October 2018.

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