ArVision Quarterly Newsletter: A Decision-Making Framework for Compliance Solutions
Arcesium's quarterly newsletter delivers our perspectives on data, innovation, and industry trends in the investments space.
The decision to invest in new software is often complex, involving a myriad of factors from strategic alignment and resource availability to internal expertise and cost.
Financial technology and operations leaders grapple with the decision to build internally, purchase commercially, or partner with technology providers on new software serving various needs — perhaps none more finicky than compliance with regulatory mandates.
Regulatory shifts compel firms to innovate their systems to keep up with the growing complexity. MiFID II’s enhanced compliance requirements, GDPR data privacy mandates, the transition away from LIBOR, and other major regulatory changes all require sophisticated solutions.
The rate of regulatory change matches the growing speed at which new investment products and customization features have been hitting the market, creating a new challenge for financial firms. Asset managers, private markets funds, and hedge funds must find ways to adapt their decision-making process on purchasing regulatory technology (RegTech) to address a new, elusive target: The regulations of the moment. Today’s rules could change at any moment, vary by region and product type and may even conflict with other regulations that also require adherence. This reality calls for an updated approach.
There is still, however, a place for some traditional decision-making logic, so let’s review this framework as a foundation for further discussion.
The traditional decision-making approach
How can financial firms stay compliant in the face of constantly evolving regulations? When making corporate-wide technology investment decisions, firms have traditionally weighed how a solution supports their strategic priorities while considering tradeoffs on time, use of resources, and cost.
The traditional approach effectively supported decision-making based on individual rule changes in a single jurisdiction, allowing leaders to prioritize their considerations according to a set of straightforward variables.
As regulatory requirements multiply decision-making must become more agile to consider a larger number of variables simultaneously. Incoming regulatory headwinds require a holistic approach that accounts for nuance, layered rules, and constant change.
Why regulatory changes complicate RegTech decisions
Regulatory changes introduce complexity that should impact financial firms’ RegTech decision-making.
A firm’s RegTech stack will need to deliver on multiple tasks, including risk management, data governance, shifting regulatory rules, transaction monitoring, auditing, and reporting, workflow lineage, cross-jurisdictional compliance, and reconciliation of occasionally conflicting regulations.
Evaluating core components in RegTech solutions
While the essential tenets of the traditional decision-making approach are still relevant, firms must be ready to adapt their processes. As your firm determines the optimal solution, you will want to consider several new factors to get future-ready:
- Design for interoperability
Where firms once began their decision-making process by evaluating strategic goals, a modern framework must ensure RegTech solutions are able to work in unison with both your strategic goals and your firm’s technology ecosystem. When the regulatory environment began heating up following the Global Financial Crisis, many firms welcomed just about any technology that could help automate regulatory reporting. The result? An obvious gap between legacy offerings and what’s required to future-proof against changing regulations.
Systems that can adapt to changes like the overturning of an SEC rule or new questions on Form PF are imperative. Interoperability of data and technical processes is essential for smooth data ingestion and egress. Also, unifying datasets from multiple sources will enable you to cleanse and validate information to reduce inconsistencies and improve reporting accuracy.
- Align on resources
In-house teams focused on building custom solutions were once the norm. While a centralized team will be critical in leading the compliance strategy, firms now have options beyond an in-house build.
Building a solution from scratch often means long development timelines — a significant drawback when rapid deployment matters. Partnering can offer access to both the technology and expertise you need, as well as quicker implementation without the additional time cost of climbing the RegTech learning curve or losing customization.
- Enable customization
Time to market will remain a pertinent decision variable with new tech. However, you must consider whether the need to build customized infrastructure for your investment strategy outweighs the need for speed.
Your organization’s readiness to adapt to changes in regulations or even in your investment strategy also drives tech customization needs. As part of your modern-day decision-making framework, you will also want to consider how you incorporate ongoing research, data management, regulatory subject matter, and development efforts to future-proof your solution.
- Implement effective controls
Internal firm coordination is imperative as regulatory requirements are nuanced and specific, typically understood by only a small subset of the firm. In an environment marked by regulatory flux, stakeholder oversight, or effective controls, can help ensure your solutions meet needs for reporting granularity, jurisdictional considerations, customer risk preferences, and more.
Effective controls can be particularly critical when challenges, like the need to quickly onboard new compliance tests, arise. But today’s technology solutions must go beyond facilitating stakeholder buy-in to address issues. New products — and even new technical architecture — designed with regulatory standards in mind, can build in effective controls from the start, mitigating issues before they arise.
- Support ongoing monitoring
Any new solution involves a cost for development, testing, and deployment. Often overlooked, however, ongoing maintenance and support costs must be considered as well.
Form PF changes set to take effect in 2025, for instance, will require firms to disaggregate funds they previously grouped for reporting. A rule change like this will necessitate a major RegTech system reconfiguration event. Addressing these types of changes with any level of regularity may quickly become an expensive undertaking. As frequent rule changes become the new norm, firms should evaluate their monitoring and maintenance, and consider solutions equipped to cost-effectively support them, before making a RegTech investment.
Creating future-ready architecture
Investment in compliance management technology is more than a technical challenge in an evolving regulatory landscape — it's a strategic imperative.
Regulatory uncertainty requires firms to embrace flexibility. Agile solutions built with modularity on flexible architectures, designed to adapt to changing market conditions will outlast many out-of-the-box commercial products that can rapidly obsolesce. It’s time to get serious about finding holistic, future-proof systems.
Just as the global regulatory landscape continues to shift, so must firms’ decision-making process and framework around new technology investment.
The factors that once clearly guided decisions have become less linear. Most firms are no longer in a position to think only about cost vs time.
In today’s environment, firms must seamlessly integrate various tools, continuously monitor data, manage stakeholder input, anticipate changes — and consider how these needs affect technology selection. Solutions that can accommodate unforeseen changes and address rapidly evolving demands allow a firm to get regulation-ready. By thoughtfully considering the decision-making variables most critical to your strategy, you may find your firm gaining ground in an unforgiving regulatory climate.
Keep reading to learn about actions you can take now to embrace and prepare for regulatory change.
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