Facing the simultaneous challenges of an increasing regulatory burden and a focus on lower fees, trustees and fund managers must find a way to deliver enhanced compliance outcomes, all at a lower cost. Purpose-built regulatory software solutions, or RegTech, endeavours to address these challenges, by delivering:
effective compliance processes,
enhanced operational efficiency,
competitive advantages and growth opportunities, and
transparency and peace of mind for those liable for compliance failures.
However, a mindset towards compliance as an operating cost, as opposed to a driver of growth, does not foster a natural environment for innovation. When coupled with lengthy implementation cycles and an understandable fear of failure, an inherently risk-averse culture must overcome significant barriers to adopt new technology solutions that improve compliance processes and outcomes.
Here, we take a closer look at the challenging environment facing compliance teams and ask how technology can help? Is RegTech a cure-all for compliance? And, are you using the best RegTech solutions available? In the words of ASIC, “if not, why not?”
Recent reviews, including the Hayne Royal Commission and Productivity Commission’s inquiry into superannuation, found systemic shortcomings in compliance practices across the superannuation and broader financial services industry. As Commissioner Hayne stated: “too little attention has been given in Australia to regulatory, compliance and conduct risks.”
Poor compliance was often revealed to be systemic, driven by a combination of antiquated systems, structural conflicts, culture, poor transparency, disconnected and siloed workflows, and human error, amongst other factors.
Now facing the simultaneous challenges of an increasing regulatory burden and a focus on lower fees, trustees and fund managers must find a way to address these issues to deliver enhanced compliance outcomes, all at a lower cost or at least without increasing fees.
Regulatory technology (RegTech) – the management of regulatory processes within the financial industry through technology – represents the industry’s best, and perhaps only viable solution.
But what is RegTech? Why do we need it, and is it really the panacea for all things compliance?
The burden of regulation
With regulatory complexity increasing exponentially, and the risks of non-compliance now greater than ever, the boards of funds and trustees must make compliance obligations a top priority.
The Thomson Reuters Cost of Compliance 2019 report found that regulatory change will remain the single biggest challenge for compliance officers, followed by an increasing regulatory burden. Following the APRA review, Australian Treasurer Josh Frydenburg highlighted the need for the highest levels of governance, transparency and accountability to ensure confidence in the superannuation industry.
However, the vast number of players involved in managing a super fund, from administrators to custodians, insurers, subcustodians, investment managers, asset consultants, promoters, administration systems providers and more, can make it extremely difficult for trustee boards to be across all the activity and complexity in fund compliance.
The vast number of players involved in managing a super fund can make it extremely difficult for trustee boards to be across all the activity and complexity in fund compliance.
With the expectation of a renewed regulatory focus on the holistic actions of a fund and any potential conflicts between the trustees and its various stakeholders, there is a strong and growing need for transparency of processes and oversight of compliance. Conventional spreadsheets, emails and manual processes create a work-surface that is simply too large and cumbersome to properly manage and oversee. Thankfully, technology can help.
Super RegTech to the rescue
RegTech is software designed to deliver transparent processes, integrated workflows, compliance oversight and analytics in fund management; purpose-built to help ensure trustees are meeting compliance obligations and serving members’ best interests. The successful implementation of RegTech can drive more effective performance and efficient operations, delivering cost savings and competitive advantages to funds, and ultimately better outcomes for members.
The implementation of RegTech therefore represents a win-win for the industry, ultimately ensuring members’ best interests are served by enabling improved compliance standards and reduced costs and fees.
A renewed mandate for regulators, coupled with the ever-growing scale and influence of superannuation capital, means superannuation funds and trustees must adapt to a greater emphasis on compliance and transparency, with severe penalties for failure.
The digital transformation of financial services and associated shift in consumer behaviour has further exacerbated the challenge. Financial services and product distribution are no longer purely the remit of banks and advisors. Instead, a myriad of digital distribution channels has led to a vastly increased pace of product launch, distribution and sales; a multitude of channels requiring regulatory monitoring; and many more disclosure requirements.
Trustees and fund managers have an ethical imperative and fiduciary duty to do what is in the best interests of their members, meaning a constant effort to reduce costs and improve returns while ensuring robust compliance processes and outcomes. The old way of doing things – spreadsheets and manual processes – no longer represents best practice and constitutes a significant and ongoing risk to products and funds. Continuing these outdated practices must surely call into question whether those responsible are meeting their fiduciary obligations.
Instead, by taking a proactive approach to compliance and utilising the latest RegTech solutions, the focus of compliance teams can be shifted to prevention, rather than simply reactively logging risks or breaches. For example, real-time monitoring and pro-active alerts powered by web crawling and machine learning technologies can help identify and address compliance concerns before they become an issue, while a centralised platform to manage disclosure and compliance ensures a single source of truth, acting as a reliable data point from which updates can flow through all relevant channels.
Perhaps most importantly, RegTech can provide boards with clear visibility of core compliance requirements, providing an on-going health check of funds and confidence for those responsible and liable.
RegTech can provide boards with clear visibility of core compliance requirements, providing an on-going health check of funds and confidence for those responsible and liable.
Such RegTech solutions provide an effective platform from which superannuation funds can respond quickly and nimbly to regulatory change. What’s more, by integrating all compliance processes on a purpose-built RegTech platform, gap analysis can identify any areas where funds are non-compliant, ensuring better management of risks. Sophisticated data searches can track down lost funds and remove duplication of processes and fees, while members’ investments can be pre-screened to ensure they are in line with their risk profile, and then monitored using post-trade compliance to confirm portfolios remain within pre-set boundaries.
RegTech delivers enhanced efficiencies by facilitating the automation and coordination of processes that are subject to compliance and regulation. Running a superannuation fund is complex, requiring the seamless operation and integration of multiple functions, from promotion and member engagement to asset and investment management, insurance, administration and compliance. By moving all operations to one platform, funds benefit from a seamless interface to manage all stakeholder interactions – reducing complexity, integrating workflows, removing silos, duplication and unstructured manual processes.
In this way, RegTech software delivers transparent processes and compliance oversight in fund management; purpose-built to help ensure trustees are meeting compliance obligations and serving members’ best interests. The successful implementation of RegTech can drive more effective performance and efficient operations, delivering cost savings and competitive advantages to funds, and ultimately better outcomes for members.
Saving costs through compliance
Replacing costly, archaic legacy systems with modern technology solutions is now a well-trodden path across many industries. With the provision of purpose-built technology solutions through a software-as-a-service arrangement, funds can now implement and scale leading technology without the upfront development cost or in-house expertise that was previously required.
Trustees and fund managers should by now be aware of the various technology solutions available to them, and the benefits of RegTech and other financial infrastructure and software-as-a-service to improve processes and outcomes, while also delivering significant cost savings to the fund and ultimately to members.
Trustees and fund managers should be aware of the benefits of financial infrastructure-as a-service to improve processes and outcomes, and deliver significant cost savings.
Simplifying and standardising compliance processes not only reduces errors, but also removes tedious, repetitive tasks from the staff workload. Although some may view automation as a threat, our experience shows automation frees staff to focus on high impact work and creates a renewed focus on their customers and growth.
Reducing operational cost structures clearly provides funds with a competitive advantage. The competitive advantages gained by implementing RegTech solutions, however, go way beyond cost savings, encompassing member engagement and experience, agility, scalability and growth.
Enhanced member engagement can be driven by digital channels and solutions tailored to individuals, delivering a superior, personalised customer experience, all with service level monitoring that ensures key processes are tracked with a robust audit trail.
When it seems like the only constant in regulation is change, a centralised hub that manages product disclosure and compliance disclaimers enables changes to be made and distributed across the fund or product ecosystem simply and efficiently. Not only does this help ensure consistently accurate disclosures, but also means your business is able to respond swiftly to change and remain focused on the bigger picture. Finally, as with digital transformation efforts in other industries, the digitisation of business processes generates vast amounts of actionable data. RegTech contains in-built analytical tools, often utilising the latest AI technology, that can be invaluable in identifying opportunities and allowing the business to make data-driven decisions that are focused on outcomes and growth.
RegTech contains in-built analytical tools that can identify opportunities and enable data-driven decisions focused on outcomes and growth.
While the advantages of RegTech are already clear, this is only the beginning. Technology entrepreneurs are just getting started, and the scope for RegTech to drive improved processes, compliance and outcomes is enormous.
Driving change in a conservative environment
The superannuation industry, however, has been slow to adopt new technology solutions that better serve members’ needs. The industry must address barriers to implementation to enable RegTech to fulfil its potential to improve retirement outcomes for Australian citizens.
“In looking at culture and governance, every entity must consider how it manages regulatory, compliance and conduct risks.” – Commissioner Hayne
The incumbent culture of the superannuation industry represents perhaps the greatest barrier to RegTech adoption in superannuation. Given the enormous responsibility of overseeing the nation’s retirement savings, and the significant penalties for failure, a highly risk-averse and conservative culture is a natural evolution of the industry.
Through this cultural lens, change is seen as a source of risk, and in the eyes of some incumbents, it may seem safer and easier to do nothing. However, in the face of looming technology disruption and warnings from regulators that the status quo is no longer acceptable, it is now inaction that represents the real risk to funds. In this new operating environment, the incumbent culture of superannuation acts as a significant barrier to meaningful change and reform.
A change in mindset is needed. Rather than considering compliance an operating cost, funds should instead recognise good compliance – and the implementation of leading RegTech solutions – as a driver of growth.
In speaking to the Australian Financial Review, then Australian Securities and Investments Commission executive director of financial services Michael Saadat said an “if not, why not” approach would be adopted to force banks to explain why they aren't using the latest technology, and expects that it will reach the point where “if you aren’t using a type of technology, you have some explaining to do.”
Superannuation boards should take confidence from regulators supporting the development and implementation of the latest technologies.
Superannuation boards should take the same approach and take confidence from regulators supporting the development and implementation of the latest technologies. In the words of Mr Saadat: "We will certainly be encouraging very strongly the adoption of these technologies, so we achieve the end outcome we are looking for without the expensive compliance overlay that otherwise would be required."
An elixir, if not a panacea
Although RegTech may not be the panacea to solve all the superannuation industry’s problems, it can make a dramatic impact on improving compliance, reducing costs, streamlining processes and identifying conflicts and risks. Trustee board directors should seize the opportunity and mandate the right technology solutions are found and implemented. After all, the buck stops with them.
The industry’s remaining challenges, as highlighted by the Royal Commission, require structural and cultural change. However, embracing improved ways of working using best in-class technology solutions is a great place to start, and can engender a broader change in culture and mindset. It is incumbent on boards to rise to the challenge and seize the opportunity RegTech presents today.
Sargon was purpose-built to help solve these challenges. Our trustee cloud infrastructure includes modern software, APIs and tools tailored to the unique needs of funds. By aggregating the back-end trustee roles and utilising purpose-built RegTech to deliver robust compliance processes and significant operational efficiencies, Sargon helps to ensure a safe, sustainable and low-cost environment.