RegTech arose for two reasons: to cater for new regulations and to automate added compliance layers.
The GFC was the catalyst for this change, following the crisis came pressure for regulators to introduce more sanctions imposed for non-compliance. This has introduced more cost and inefficiency to the already fictitious advice process, with the consumer having to wear the inflated cost of advice for these inefficiencies.
With compliance departments expanding and clamouring to get their heads around the interpretation of new regulatory obligations, the importance of RegTech started to form.
As former Prime Minister Scott Morrison stated in a previous speech, there’s a burning need for regulatory technology to lower compliance risk and reduce the cost burden. “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, “when successfully implemented, 'compliance by design' can increase the confidence of regulators, consumers and the community.”
What is RegTech?
FinTech and RegTech have similarities and some FinTechs are addressing regulatory obligations as features within their platforms, both terms in-essence use technology to solve compliance problems within the financial services sector. As an example: a.i.'s FinTech (with over $40m of capital invested) has solved many aspects of client transparency and best interests, whereby advisers can automate their data capture, and ongoing service arrangements, and model future scenarios & advice strategies live in front of clients, determining recommendations based on the client's actual goal achievability.
Another example is having a client app or portal so the client has on-demand access to their advice, fees, services, and investment balances, providing complete transparency.
Technological innovation across RegTech helps advisers to provide a better customer experience, improve client outcomes in line with meeting their goals & objectives, and lowers advisers' cost to provide financial advice to more clients.
For financial licensees and advice practices, compliance is an important problem to manage diligently. The interpretation of regulation appears to be black and white, however, every AFSL legal department has its own take on how to implement legislation and often lacks a standard, and consistency, across the industry. This tends to act as a barrier for technology companies that are using innovation to enhance compliance via digital means, as they are stuck in the old way of doing things.
No one makes money from being compliant, compliance will always cost licensees on their bottom line, which is why automation needs to be a focus as more regulatory layers are added to the advice process.
RegTech provides financial firms with a solution to automate their manual advice processes, access their data centrally, and digitise. By minimising the time it takes a licensee to access advice recommendations and SOAs for audits, including client data across all their authorised reps at scale, compliance professionals can respond more accurately and efficiently when faced with an enquiry. This brings about transparency across the entire value chain, from regulators to licensee management, through to the consumer.
Exploring RegTech Elements
RegTech is a revolution for financial planning software. Technology, of course, offers the only real promising solution via automation. To date, consumers have worn the increase in compliance costs, and it has not provided them with any additional value. We need to manage regulatory inflation in balance with consumer confidence.
For financial planning software - one of the most-maligned sectors of the broader Australian finance industry – RegTech can prove particularly revolutionary.
Yet for that to happen, the advice industry must lift its technology game and licensees must adopt a new way of doing things. The advice process is set on legacy technology and does not support today's regulations.
Today’s consumers want to access their financial information on their smartphone: everything from tracking their goals, cash flow (spending and savings), portfolio management, banking, mortgage, insurance, and advice strategies.
Regulatory Reporting & Risk Management
RegTech needs to address the way licensees monitor the suitability, quality, and compliance levels of the financial advice they hold legal responsibility for - something we call "advice suitability parameters" or rules set around advice strategies.
A digital-based statement of advice (SOA) platform built on RegTech principles that checks for inconsistencies across multiple parameters without the need for human intervention, is the way of the future. This proactive control over advice for a licensee reduces the risk of non-compliance and centralises the accessibility of advice for compliance departments.
RegTech-backed advice technology can lower error rates, potentially eliminate disputes, and improve client protection. However, in order to fully achieve these innovative goals outlined in this article, both industry and regulators must agree on common advice standards and determine what compliance looks like in a RegTech world.
If consumers could only see how their SOA has been ‘rated’ or ‘benchmarked’ within a compliance industry standard, based on thoroughly-tested RegTech processes, then perhaps we could restore consumer confidence in the advice industry.
Reputation improvement, in the long term, offers a better solution than the path of damage control.
Learn how the value of financial advice beyond an SOA and the Advice Intelligence financial planning software can save you hours of time on admin and client management through the advice process.
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