Regulatory Technology (RegTech) is defined as, “The application of modern technology solutions that assist highly regulated industry stakeholders, including regulators, in setting, activating and meeting regulatory governance, reporting, compliance and risk management obligations.”
The goal of RegTech is to enable financial institutions to meet regulatory requirements more efficiently and effectively, while also reducing costs and improving transparency and accountability. For example, RegTech solutions can use advanced analytics and machine learning algorithms to analyze large volumes of data, identifying patterns and anomalies that may indicate potential compliance issues. In addition, platform Solutions that provide high degree of configurability so that regime agnostic reporting workflows can be maintained in a cost-effective manner.
In short, RegTech provides a highly beneficial impact to the Capital Markets sector.
The UK Government is proposing widespread changes to its financial services (FS) regulatory system, having set out its “Edinburgh Reforms” in December 2022, aimed at making the UK FS sector “open, sustainable and technologically advanced”. The proposed legislation represents the most significant and extensive regulatory change since the UK left the EU. It builds on the reform agenda that the Government is taking forward via the Financial Services and Markets Bill (FSMB), expected to become law in Spring 2023.
The package also coincides with ongoing major regulatory change programmes, including SFDR, CSDR, EMIR Refit, and new sustainable finance regulations.
With the speed of all this regulatory change and ever-increasing data volumes, financial institutions are constantly challenged to manage the cost and overall complexity of their operations. There has been an increase in both complexity and the level of scrutiny over the decade in RegTech, effectively placing more controls and governance requirements onto reporting institutions. Cross border data handling may be challenging as opposed to moving data from onprem to a cloud data center, while personally identifiable information is at risk as well as handling and proper control of sensitive Client Identifying Data (CID).
Capital Markets regulatory changes are often a response to market failures. They are frequently applied reactively to avoid the recurrence of past system weaknesses. This ‘reactive’ nature can make compliance complicated and costly. RegTech handles this issue by deploying effective solutions that may be cloud enabled, with the flexibility to configure data workflows according to regulatory eligibility and reporting criteria. These solutions also enable strong data lineage, from source to report, to meet audit requirements and provide transparency over the complete data journey.
Whilst the emergence of new RegTech applications will bring undoubted benefits to the Capital Markets sector, it is imperative that these are carefully integrated and fully tested before a production release. The opportunity has arisen for strong testers to build on their technical skills and Agile experience whilst delivering the latest technology to end clients. Each RegTech application brings in own challenges in test approach and the skills required to implement it. Some examples of challenges faced and how testers can evolve to meet them include:
Cloud platform transitioning
Transitioning to a cloud-based platform is likely to be an organization’s first foray into RegTech and moving an application to the cloud can be a unique challenge. It is important to build out a cloud migration testing strategy and ensure that an application is working as it should in the cloud. Some examples of the challenges faced and how testers can overcome them include:
The complexity of the regulatory environment and frequent updates to regulations can make it challenging to keep up with changes and ensure compliance, which is what RegTech offers as the next step forward. Having RegTech in place can help capital market organizations stay on top of regulatory changes and ensure that systems remain configurable and compliant over time.
Capital Markets organizations thrive and survive on data and as the amount of it increases in volume, velocity, and variety the introduction of Big Data solutions has become key. For many years, data management workflows have been heavily manual. There are many different dataset types within capital markets, such as trade and transaction data, risk data, market data, pricing, reference data and accounting data, with storage often being fragmented across spreadsheets and desktops. To overcome this, data architecture is now built with technology stacks that support data of higher granularity, diversity and frequency than could be accommodated previously. Data loading and consolidation can also be fully automated using application programming interfaces (APIs).
The testing of Big Data solutions brings its own challenges, since Big Data is a collection of large datasets that cannot be processed using traditional computing techniques, traditional data testing methods do not apply to big data. A specific big data testing strategy needs to be created, which should include big data testing techniques, big data testing methods and big data automation tools.
Automation in big data is essential to the big data testing strategy. Testers must audit massive amounts of data to confirm its accuracy and relevance for the business and manual testing this level of data is impossible. Specific data automation tools are designed to review the validity of this volume of data.
Having a solid big data testing strategy brings many benefits as big data testing is designed to locate qualitative, accurate and intact data. Applications can only improve once confirming the data collected from different sources and channels functions as expected.
Testing using accurate data is essential for crucial business decisions. When the right data is utilized, it becomes a positive feature. It helps in analyzing all kinds of risks and ultimately becomes a great aid to make sound decisions.
With the advent of big data solutions there has become a gap in the market for skilled data professionals to perform testing. It’s not easy to manage test data when it’s not understood by the test team. Investment by testing consultancies in training programmes with a specific focus on Capital Markets is helping to bridge this gap.
RegTech will help revolutionize the Capital Markets sector, allowing asset managers, investment banks, brokers, and other Capital Markets organizations to process data and comply with regulatory changes quicker, safer, and more accurately.
Users need to be ready to embrace these technologies and the challenges they bring. Adapting and learning new technologies, methodologies and applications is key, and this adaptability will allow RegTech users to invigorate their technical landscape.
