Reporting and Governance

The recent banking scandals in Australia have proved to be a major catalyst for developing technology solutions as the industry adapts to comply with new rules and tries to win back public trust. By Justin Pugsley 

Much of the focus for regulatory technology or regtech is generally around managing issues relating to know your customer (KYC) and anti-money laundering (AML). 

Globally, more than 60% of regtech vendors have offerings addressing either KYC or AML requirements, with data collection and reporting being key competencies for 55% of vendors, according to a report by the Cambridge Centre for Alternative Finance and EY.

However, Australia’s zeal for regtech has been given a major boost following revelations of widespread abuse of customers by banks, which rocked the nation and created a severe public backlash.  

Banks – and regulators, who did not come out well from the scandal either – are now looking to regtech to ensure this does not happen again. However, the twist in the Australian case is that rather being primarily about KYC and AML, the intensity of the focus dwells on tackling conduct issues, which lay at the heart of the banking scandals. 

No doubt Australia’s banking executive accountability regime (BEAR), designed to hold wrongdoers to account personally, is another strong driver. 

Australia is the first country to set up a dedicated national association for regulatory technology, which it did in 2017 with the RegTech Association (RTA). Australia is also emerging as a major global hub of regtech innovation alongside the UK, US and Singapore. 

A key reason for this burst in activity was the Royal Commission, set up in December 2017 and led by Kenneth Hayne, a former Justice of the High Court of Australia. It spent 12 months thoroughly investigating widespread abuses of customers by the financial sector, which included banks charging customers, some dead, for non-existent services.

The Commission came up with 76 recommendations, which the government is following through on.  

Deborah Young CEO, at the RTA, says that since the Hayne Commission, banks in Australia have changed their attitude towards regtech and are now actively interested in solutions that will help them comply with new conduct rules. 

One of the roles of the RTA is to help regtech firms get access to the right people in banks, which they often find challenging. It also works closely with banks, government, regulators and large IT firms.  

As an example of the change in attitude, she cited the case of an entrepreneur who had developed a conduct solution and was challenged in getting engagement with it in Australia and was considering taking it to the UK.

The Hayne catalyst 

“Then Hayne happened, driving a laser focus on conduct and culture and as a result they are now getting traction,” says Ms Young.

This is seeing banks monitor more carefully the financial advice they give to clients and also the marketing literature they publish. 

Nonetheless, as explained in the Cambridge report, acquiring clients in the financial services space typically involves dealing with large and complex firms, which is usually a long-winded and costly process. 

Ms Young recognises this problem. “More work needs to be done to shorten the sales cycle and for banks to onboard products more quickly,” she says. The RTA is hoping to help address this issue by creating more dialogue and interaction between regtech firms and the banks. 

The problem is that banks, which have to play safe given the reputational issues at stake, are often loath to give business to start-ups in case they cannot deliver, maybe because they run out of money or overestimate their capabilities.  

In the UK, some regtech start-ups have chosen to work with big consultancies such as Deloitte or Accenture, which have well established relationships with banks and can support those smaller firms through their early growth phase. This can considerably accelerate the sales cycle.  

In terms of the regulators, the Australian Securities and Investment Commission (ASIC) has taken a leading role in promoting the use and development of regtech in the financial sector and has been given a budget to do so. In April, the Australian Prudential Regulation Authority (APRA) selected Vizor Software and Dimension Data to revamp its data reporting systems. And then there is AUSTRAC, the country’s financial crime fighting agency, which has a well established framework for working with regtech firms.

Unusually for the tech sector, Ms Young says the average age of people starting up regtech firms in Australia is 45 to 55. “They are usually founded by people from the industry who can see what the challenges are and have found a second career for themselves,” she says. “They usually don’t have a technology background, but often found their businesses with a tech person.”  

She reflects on the fact that regtech is very much about supporting incumbent businesses and helping them to adapt to regulatory demands. Fintech firms, on the other hand, tend to have more youthful founders and are generally out to disrupt traditional financial services.  

Going forward, Ms Young sees a lot more collaboration between financial firms and regtech firms as the former will need to integrate regulatory compliance technologies more deeply into their products and services and this also applies to the new breed of fintech firms.

She also foresees a strong growth in the number of regtech firms, a great many are still in the start-up phase, eventually followed by a contraction in the overall number – as is typical when boom industries mature and consolidate.