Blockchain technology to increase productivity in banking compliance
According to an annual study conducted in 2020 by Thomson Reuters, the three main challenges of banking compliance revolve around regulatory developments, budget and resource allocation, and data protection.
The cost of compliance continues to rise. Indeed, without a competent, well-resourced and technologically aware compliance function, companies are unlikely to be able to manage and mitigate regulatory challenges. New technologies could provide opportunities to increase productivity while reducing costs.
In Switzerland, the new Financial Institutions Act (FINA) and Financial Services Act (FSCA) that came into force in January 2020 impose new compliance and auditing standards that are difficult to meet without new technologies. The increased requirements imply administrative work that needs to be optimised. The administrative workload is heavy and growing, as shown by the Accenture “2019 Global Financial Services Consumer Study” with almost two thirds of respondents confirming that some compliance responsibilities are now being transferred from the “second line of defence” to the “first line”. In the face of these challenges there is a need to accelerate the digitalisation of banking compliance.
The advantages of the Blockchain for the sector
Emerging technologies such as blockchaining offer significant potential to transform operations and regulatory productivity, according to the Deloitte report “The Future of Regulatory Productivity, powered by RegTech”. By improving compliance productivity through process efficiency, companies save compliance-related costs. In general, a blockchain compliance platform provides an immutable and aggregated record, a more efficient compliance process especially for KYC / AML and also for transaction reporting.
In terms of data protection, decentralised registry technology increases the level of security and reduces the number of errors, allowing multiple transactions to be carried out with confidence. At a time when cyber security is a priority, the sharing of information between parties is secure and entities remain in control of their data: the technology allows information to be stored in an encrypted manner while allowing information to be shared intelligently with selected entities. Thus, entities or individuals have complete control over the information they share and with whom they share it. Financial institutions are increasingly likely to integrate blockchain technology into their systems over the next few years, according to the PwC Global FinTech Survey.
Streamlining the relationship between independent asset managers and custodian banks
Within banking compliance there is one aspect in particular where the application of the blockchain deserves special attention. Today, the relationship between independent asset managers and custodian banks is indeed largely impacted by compliance management and the processes are sometimes still complex and repetitive. Onboarding with a custodian bank requires several hours of work and is still done manually for some of them. Compliance documents are stored by banks in a heterogeneous way. Despite the start of digitisation, each entity uses its own tools and standards. The exchange between platforms is impossible and the updating of data is complex. As for the annual review of relations with the bank, the process requires administrative verification work that can take up to several months.
Blockchain technology would make it possible to fluidify these exchanges but also the audit. This is notably what the Wecan Comply blockchain platform offers by pooling resources and standardising the information exchanged between financial players. Thanks to ultra-secure data exchange in real time, data quality is improved and the reduction in operational work results in a significant reduction in operating costs. Technological innovation is an opportunity for both independent asset managers and custodian banks to spend more time on their business priorities through products and services with high added value for their clients rather than on regulatory requirements.
Today financial institutions are trying to automate controls and monitoring in the areas of KYC/AML, trade monitoring, reconciliation and others. Some institutions have begun to integrate the blockchain into this automation, notably through the fluidity of exchanges between banks and independent managers made possible by pioneering solutions such as Wecan Comply. And this is only the beginning of compliance on the blockchain. In the future, regulators will seek to have direct access to these tools, either on a continuous basis or during surveillance controls, according to the PwC report “Financial Services Technology 2020 and Beyond: Embracing disruption”. The possibilities offered by technology are numerous and tomorrow auditing can be automated and platforms connected to official registers by replacing PDFs with certified information.
Therefore, it is essential that companies integrate data and compliance checks as a priority today. It is short-sighted to focus solely on compliance with existing regulations. Companies need to include this thinking now to gain a better understanding of where their data and associated controls are located. By doing so, they will enhance their credibility with regulators today and be ready for the future.
Article written by Nathan Douet and Camille Ernoult