Why does existing tooling not establish regulatory traceability?

The financial services industry continues to rely on horizon scanning tools + spreadsheets to manage regulatory change. Can we now say that tools exist that will promote organisational change?

Regulations change continually from initial drafting, through implementation and via further rules changes and guidance when they are in force. Regulation is maintained in many different formats and locations, creating complexity to analyse texts across regulations. To solve this problem, software will need to digitise and structure texts.

Establishing traceability

It is very uncommon for a firm to be able to establish traceability and robustly link their implementations back to the underlying regulation. Traceability to the regulation decreases costs for firms through increased compliance and decreased rework. It benefits individuals from board level downwards who can demonstrate an appropriate level of professional diligence. It also creates the foundation for ongoing automation of regulatory workflows.

Even the smallest firm will have multiple understandings of each regulation. Someone needs to own the house view and make this available across functions and locations. Large organisations struggle to maintain a view on where and how new regulation is implemented. We also operate in an environment where new regulation sits alongside and on-top of old.

The Covid epidemic is the latest cost pressure to hit an industry already dealing with long-term pressures on margins. Cost pressures are now impacting the previously untouchable compliance function. Firms that can see beyond the current paradigm will decrease cost and risk in managing their compliance.

The technology most suited to tackling these problems is natural language processing (NLP). Single Rulebook is an example of a domain-specific implementation of NLP.

NLP engines allow regulation to be digitised into a graph representation. The graph structure creates and maintains links between regulations that are otherwise hard to track. Changes in texts are identified, contextualised and surfaced by the technology. Digitised regulation is queried semantically, enhancing completeness and efficiency.

Building a specialised workflow for tracking regulation

This creates a robust lineage of regulation. Using links to third party applications creates traceability from regulation to implementation. We now exist in a software ecosystem where software is able to communicate via APIs. Regulations can now talk to business processes via API.

Single Rulebook uses state of the art tooling and approaches to enhance the depth of benefit that integration with other systems can provide. For example, integrations completed against our graph respond automatically to changes in regulation. There is no “human in the loop” processing and analysis of documents. Changes and impacts are analysed on the same day that they are published. The existing generation of software is typically blind to second-order impacts, as it does not deploy this technology, or relies on human analysis to break down documentation. This approach is both slow and subject to error.

Tool adoption is also determined by processes within firms. So are the organisational barriers to adopting improved tooling insurmountable? Organisational complexity is seen as the key barrier to implementing a traceability tool. For example, adopting tooling will look different at different stages in the lifecycle of a regulation. Doing this at the drafting stage would be ideal, but how does this fit with the mass of already implemented rules that we are dealing with currently?

Interpretation of regulation happens in many places. This may begin with an initial breakdown from a lawyer and end up in the hands of an external developer or junior operations clerk. Understanding where these weaknesses lie helps firms decrease the risk of non-compliance.

Financial services firms must also deal with the large number of joiners and leavers across a project lifecycle. These may be permanent staff or contractors, but in each case a leaver takes away some level of understanding that costs time (and money) to reacquire.

Our recommendations

In our recent Single Rulebook webinar on the topic of traceability, our panel broadly discussed three key recommendations for improving regulatory change management.

  • Lifecycle – track regulations across their lifecycle using software. Where are we applying this regulation? Has the guidance changed?
  • Centralisation – ensure the house view is widely available to staff. Have strong policies on ownership for regulatory obligations. Ensure handoff from projects into BAU.
  • Embed tooling – ensure adoption of tooling through strong processes to realise benefits. Leave behind a process that proactively reacts to changing regulation

These recommendations show that both technology and process have a role to play in changing how firms manage change. We don’t exclude spreadsheets from this future state – in fact we offer functionality to enhance them.

However, modern regulatory traceability is the foundation to build a new way of working.

With climate/ESG regulation developing, IFR/IFD, CRR 2/CRD V, CFTC reporting, SEC reporting and more upcoming, firms have the perfect opportunity to review how they work with regulation.

If you wish to discuss this further, please contact us.