Alastair Majury and Some Information from S&I Review

Alastair Majury is an Associate member of CISI

I found the below article in the Chartered Institute for Securities & Investment’s S&I Review, which I believe is worth sharing.

With fintech investment in full swing, all eyes are on the next golden opportunity within the booming sector. ‘Regtech’ could be just that

Finding a solution to a problem is always satisfying. It’s even more satisfying, though, when that solution presents a considerable commercial opportunity: an innovation that financial firms across the globe could adopt to make complying with increasingly complex regulation easier, faster and cheaper.

Enter ‘regtech’: defined by the Financial Conduct Authority’s (FCA) Project Innovate as “any technological innovation that can be applied to or used in regulation, typically to improve efficiency and transparency”.

Most people have by now heard of fintech (financial technology); its meteoric ascent has been exhaustively documented in the media. One minute, economists ponder its limitless possibilities; the next, they warn of its potential for untold market disruption.

Dystopian future?

Sir Mark Walport, the UK Government’s Chief Scientific Adviser, recently praised fintech as a tool with which financial services could “re-establish trust… while opening up financial services to a vast number of unserved or under-served consumers”. Sir Mark went so far as to say: “In short, fintech can democratise financial services.” Part of his rationale for the bold claim is that technology frees up surplus capital and time for investment in small businesses and philanthropy.

The article in which he is quoted, however, is titled ‘Chief Scientific Adviser warns on dystopian future of fintech’, which demonstrates the concerns that surround the sector. Namely these worries relate to technological innovation having the potential to outrun the necessary regulations to protect the sector from financial crime and safeguard against the destabilisation of mechanisms that provide monetary stability.

“Traditional human regulators will no longer be able to keep up, but it’s clear that the need for regulation is only going to increase in importance”

For background’s sake, it is worth noting the scale of the fintech sector. According to a report by management consultancy company Accenture, fintech is the fastest-growing area of investment in Europe. Global investment in the sector’s ventures trebled from $4.05bn in 2013 to $12.2bn in 2014, which is no mean feat, so the extensive coverage is likely warranted.

Wide spectrum of innovation

But what commentators often gloss over in opinion pieces is that fintech is a vast umbrella term and the arena itself is multifaceted, covering a wide spectrum of technological marvels. For instance, CodeBase in Edinburgh, Britain’s biggest tech start-up hub, is using its links with the University of Edinburgh’s informatics department — itself Europe’s biggest by some way — to develop fintech offerings like photo-imaging cash, while SecureKey allows online businesses to rid themselves of the need for passwords.

Regtech is one area that has caused regulators, financial firms and technology startups alike to take notice. The term regtech was coined by Fintech Circle Innovate CEO Nicole Anderson, who summed up this promising commercial opportunity with the line “the regulators’ pain is the sector’s gain”.

Automating compliance

Engineers in this sub-field hope to create technology to automate regulation and compliance, removing the need for firms to spend time and capital on meeting an exhaustive list of regulatory requirements, a list that will only grow this year once regulation such as the second Directive on Payment Services comes into force. Software aims to scan automatically companies’ data files with a fine-toothed digital comb to pinpoint the requested information and collate it into custom-made reports that match the regulators’ checklists. Instead of the company installing the software, the regtech firm would typically sell the service, so the company’s costs remain fairly low.

At a recent technology summit, Dr Michael Lynch OBE, Founder of Invoke Capital, described regtech as: “Perhaps the biggest fintech opportunity in London.” Dr Lynch told the S&IR: “The financial system has become rapid, complex and innovative at the same time as a tsunami of new information from emails to trading data has become available in real time.

“In this new microsecond and terabyte world, it’s clear that traditional human regulators will no longer be able to keep up. However, it is also clear that the need for regulation and stability monitoring is only going to increase in importance. Consequently, we see the automation of regulation, so-called regtech, as one of the most interesting emerging technology areas.”

Lisa Moyle, Head of Programme at technology industry trade body techUK, also sees the potential benefits of this relatively untapped segment. “Regtech lowers the cost of compliance and, from a government policy management perspective, it improves the picture you’re getting from financial institutions. It’s more accurate and it’s in machine-readable format, which increases efficiency,” Moyle enthuses.

In short, regtech could facilitate real-time surveillance of messages, trades, market movements, exposures and hedging.

Governments are taking note

Not surprisingly then, the UK Government is getting on board. According to the ‘Fintech Futures Report’ published recently by the Government Office for Science, the FCA’s Project Innovate is working with HM Treasury and the Prudential Regulation Authority to explore ways of supporting the adoption of new technologies to facilitate the provision of regulatory requirements.

Two types of innovation appear to underlie regtech. First up is text analysis, which Dr Lynch explains is “the ability to read messages, emails or listen to phone calls and understand what they mean in real time, so they can instantly be checked against compliance”.

The second form of technology, says Dr Lynch, is machine learning and big data analytics, “which can sort through large numbers of transactions, spotting those which pose a threat to an organisation in some way.”

Michael Backes, Managing Director of Hamburg-based Liquid Labs, goes further and suggests that, in the not-too-distant future, financial services could be at a point where “intelligent algorithms point out dangerous patterns in the markets where regulators can be better informed or make better decisions.”

Looking to cut costs

One area of regulation that has already seen the benefit of this new compliance wizardry is ‘Know Your Customer’ (KYC). Following investigations into banks allegedly involved in money laundering, regulators have been calling for institutions and financial firms to implement tougher policies to detect dubious client accounts. Not surprisingly, this is driving up IT overheads and institutions are looking for ways to reduce the cost.

This is where regtech can take centre stage.

Backes explains: “There has been a wave of KYC technologies that are usable inside the regulatory framework. The German authorities have halfway given in on allowing remote KYC. It hasn’t been completely sorted yet, but it would allow companies to take on new customers at much lower costs and allow them, in turn, to create trust quicker.

‘Trust’ is a word that players in the fintech field are acutely aware of. It is one of the biggest challenges that startups will need to overcome in order to dent the market; or at least, the banking market. Startups will have to prove that they can establish a solid client base and generate enough revenues for their offering to be attractive to investors.

Backes ponders why this is the case: “Am I willing to let a robo-advisor manage a part of my wealth? Yes, but I would be hard-pressed to let it manage 100%. The risk of letting a new company touch a significant part of my financial life is difficult. Even if I hate the banks or brokerages, I know that they are held to certain rules that are meant to provide stability or security.”

Starting with the digital natives

For now, the most tangible commercial opportunity for fintech and regtech startups, and in turn their investors, is the small and midsize enterprise market. As banking and innovation expert Dr. Hansjörg Leichsenring wrote in a recent blog, “It is here that fintech startups can establish a presence in territory already occupied by digital natives.”

And the results should, in theory, free up compliance officers to focus on recognising and acting on potentially much bigger threats to their firms. Contrary to the warnings, perhaps fintech, and specifically regtech, could truly mean ‘win-win’ for the financial services sector.

Watch this space.

And I also came across the below article from CISI’s S&I Review, that I thought was worth sharing. Original Article is here.

(Some slight edits to the below)

The large fine handed to Bank of New York Mellon in April underlined the importance of complying with the UK regulator’s new rules on client assets and money.

In June 2014, the Financial Conduct Authority (FCA) published a raft of proposed changes to its Client Assets Sourcebook (CASS). The changes came into force in two waves later that year: 1 July and 1 December.

From 1 June 2015, FCA-authorised firms have needed to comply fully with all of the changes published last June. Unlike the 1 December 2014 changes, compliance will now be necessary for all clients.

The FCA’s CASS regime, revised after the collapse of Lehman Brothers in 2008, is designed to help ensure that clients’ assets and money are safe in the event of firms failing and exiting the market.

The importance of CASS compliance was made clear in April, when the FCA fined the Bank of New York Mellon’s London branch £126m for failing to protect its customers’ assets. Georgina Philippou FCSI, Acting Director of Enforcement and Market Oversight at the FCA, emphasised that other firms “should take this as a further warning that there is no excuse for failing to safeguard client assets”.

With the 1 June 2015 deadline for total CASS compliance now past, here are ten key areas that firms need to address.

1. Write plainly and thoroughly You may know exactly what you’re doing, but the FCA expects firms to be able to prove, in a document, that they understand the money flows, emphasises Julian Sampson, Chartered FCSI, Director of Fulcrum Compliance and former Chairman of the CISI Compliance Forum.

The document must explain, amongst other things, how and why you carry out reconciliations. “This may seem like stating the obvious, which makes writing such a document harder to do,” says Sampson.

“The best way of doing this is to get some colleagues together in a room and ask, ‘what are we doing in this area?’ and then put all those questions up on a whiteboard. You might want someone who doesn’t know about client assets in the room, so they can ask for answers that might otherwise seem too obvious for you to consider.”

2. Persevere with acknowledgement letters The FCA has issued new mandatory templates (called acknowledgment letters) for use when opening new client money bank accounts and also for all existing client money bank accounts.

Firms should be prepared to show plenty of persistence in their efforts to get the signatures required for the letters. Andrew Henderson MCSI, Partner at corporate law firm Eversheds, says: “Where dealing with overseas banks, it has been proving difficult for firms to get the letters signed.”

3. Be clear about who has access The FCA has revised the circumstances in which authorised fund managers (AFMs) will be permitted to cease to treat money as client money for a one-day window. During this time, AFMs will carry out a ‘delivery versus payment’ (DVP) transaction for the purpose of setting a transaction in relation to units in a regulated collective investment scheme.

“An AFM will have to ensure that, where it is unable to pass money received from a client to the depositary of the fund which the AFM manages by close of business the day following receipt, it treats that money as client money,” says Henderson.

Refresh your memory on CASS
The CISI offers members a Professional Refresher elearning module on Client Assets and Client Money. Click this box to find out more

4. Ensure organisational agreements are transparent The FCA is reiterating the principle that one client’s money should not be used to fund another client’s investment business.

“The basic principle is that a firm should not be using Peter’s money to pay for Paul’s securities,” says Henderson. “It doesn’t mean, however, that the FCA expects you to use your own firm’s money to pre-sell acquisitions.”

He adds that a firm must ensure its organisational arrangements are adequate to minimise the risk that client money may be paid for the account of a client whose money is yet to be received by the firm.

5. Be ready to report Provisions in CASS will now require firms to honour client requests for information on their holdings of client assets, but will permit firms to agree to charge clients reasonable costs for doing so.

6. Register titles carefully CASS will restrict a firm’s ability to register a title to its own assets in the same name as any custody assets that are registered in the name of a nominee to circumstances in which this is necessary to facilitate a client transaction.

Firms need to review the manner in which assets are registered and make changes to comply with the revised rules.

7. Brush up on your record-keeping skills The FCA is establishing clear requirements as to the steps a firm is expected to follow when undertaking an internal client money reconciliation.

It is also mandating the minimum frequency at which firms should undertake client money reconciliations and introducing more detailed notification and record-keeping requirements.

Firms need to review record-keeping, reconciliation and reporting systems and change as necessary, then test the effectiveness of any changes made.

“You need to be able to demonstrate you’ve had in place a set of systems that are reasonably related to what you’re trying to prevent,” says Henderson. “Even if something goes wrong, there is a difference in terms of consequences between the FCA saying ‘you don’t know what you’re doing’ and saying ‘you’ve broken the rules.’”

8. Keep everything in its correct place The FCA is enhancing the due diligence requirements that firms must carry out on banks with which they place client money. Firms are required to periodically assess whether they are diversifying these third parties appropriately.

9. Segregate money The FCA is generally requiring firms to receive all client money directly into a client bank account — except where firms are using the alternative approach to client money segregation.

Fulcrum Compliance’s Sampson says: “Firms taking an alternative approach have more to do in order to comply with CASS, as they have to justify their alternative approach to their auditors and the FCA. If not now, then certainly in the near future.”

10. Ask yourself, “Is everyone trained?” Your CASS operational oversight function might know all the issues. But Sampson urges firms to consider whether other employees require training in client assets and money.

He asks: “Do board directors understand your firm’s client money issues? Do client-facing staff know what they should do when presented by clients with an envelope of share certificates?

“Firms may want to think about including something on CASS guidelines in their regular compliance updates, whether it’s via newsletters or emails. Some firms run regular face-to-face seminars for their staff.”

It is advice worth heeding considering that, as with cyber security, an organisation’s compliance is often only as strong as its weakest link. And as the fining of Bank of New York Mellon has demonstrated, firms cannot afford to take any chances when it comes to CASS compliance.

Alastair Majury resides locally in Dunblane, and is an IT Consultant working across the country. Alastair is also a volunteer officer at the local Boys’ Brigade company, a charity which focuses on enriching the lives of children and young people, and building a stronger community.

Alastair Majury is also a highly experienced Senior Business Analyst / Data Scientist with a proven track record of success planning, developing, implementing and delivering migrations, organisational change, regulatory, legislative, and process improvements, when providing my Senior Business Analyst / Data Scientist services for global financial organisations, covering the Challenger Bank, Retail Banking, Investment Banking, Wealth Management, and Life & Pensions sectors.




I am a Chartered Member of CISI, which is the UK’s leading securities and investment professional body. Alastair Majury resides locally in Dunblane.

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Alastair Majury

Alastair Majury

I am a Chartered Member of CISI, which is the UK’s leading securities and investment professional body. Alastair Majury resides locally in Dunblane.

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