The changing landscape

The changing landscape How to use RegTech and make regulatory compliance your strategic advantage www.pwc.com/ca/fs

How to use RegTech and make regulatory compliance your strategic advantage It’s difficult to imagine a world without the internet or mobile devices. They’ve become core elements of our lifestyle and have brought a high degree of disruption to virtually every area of business. The financial services (FS) industry is no exception; the digital revolution is transforming the way customers access financial products and services. Although the sector has experienced a degree of change in recent years, the constant penetration of technology-driven applications in nearly every segment of FS is something new. One such segment is regulation. At the intersection of regulation and technology lies a phenomenon that has been accelerating the pace of change and is reshaping the industry’s status quo—it’s called RegTech. The RegTech landscape is evolving and organizations are asking the following questions to better understand how to leverage RegTech to be more effective, efficient and competitive in the marketplace: • What’s the need for RegTech solutions? • What does the current global RegTech ecosystem look like? • How can RegTech transform core regulatory processes? • What are the next steps as we explore and embrace RegTech? The changing landscape How to use RegTech and make regulatory compliance your strategic advantage 2

What are the biggest drivers of RegTech solutions? 1 Our 2016 Global FinTech Survey showed that a large majority of respondents (73%) rated cost reduction as the main opportunity related to the rise of FinTech. Compliance costs have been rising at the big global 79% banks. For example, a major US bank hired an additional 4,000 compliance employees in 2013, and another major US based global bank is on pace to 2 Our 19th Annual Global CEO add more than US$3 billion to its compliance budget. Survey identified that CEOs A tough economic environment and increasing compliance related cost puts continue to be very concerned a downward pressure on the Return on Equity (ROE) targets of financial about increasing regulatory institutions. In addition, the regulatory landscape continues to become complexity. In fact, 79% of CEOs cited more complex and this requires a more agile response from the financial over-regulation as a top threat institutions. However, the legacy compliance and regulatory systems do not to their organizations’ growth allow for an adaptable infrastructure. Attempts to change the infrastructure prospects—making it the fourth leads to a struggle that’s often expensive, extremely difficult and only year in a row that regulatory occasionally successful. concerns have risen.3 Regulation technology, or RegTech, has allowed for the rise of a new breed of tools and platforms. Applied to regulatory-related needs, these innovations could transform the landscape by automating processes, lowering costs and increasing effectiveness. Organizations that face steep regulatory compliance costs and a lack of an agile environment will likely invest in new RegTech solutions. These RegTech innovations could include solutions for audit, finance, risk management and other areas related to regulatory compliance. By making the most of advanced algorithms, machine learning, analytics and real-time capabilities, RegTech solutions stand apart from traditional software tools. Figure 1: What are the biggest drivers of RegTech solutions? 73% 62% 57% 56% etention evenues eduction entiation oved customer r fer Cost r Dif Impr Additional r 1. PwC state of compliance study 2016. Retrieved October 27, 2016. 2. Publicly available sources 3. PwC. January 2016. 19th Annual global CEO survey. Retrieved October 27, 2016. The changing landscape How to use RegTech and make regulatory compliance your strategic advantage 3

What does the current global RegTech ecosystem look like? Brexit and FinTech The RegTech ecosystem is evolving quickly, with several regulators and industry forums driving solution development, start-ups focusing on different aspects of On June 23, 2016, UK voters the market and use cases expanding from core operational requirements of the FS chose to leave the European industry. Union, creating uncertainty, Global regulators and industry forums have started to provide support, guidance including around the FinTech sector, in the United Kingdom. and, in some cases, an incubator-like environment to facilitate the growth of The United Kingdom has fostered RegTech solutions as well as foster dialogue between various stakeholders. The innovation and disruption in FS, European regulatory bodies have been leading the pack by setting an environment and how UK-based FS companies that enables RegTech innovation. The Financial Conduct Authority (FCA) in the continue to operate in Europe will United Kingdom last year published a list of the most promising RegTech start-ups be a critical part of the pending that provide a range of solutions such as risk control and management, activity negotiations. The UK FinTech and transaction monitoring, Know Your Customer (KYC) identity verification, sector could be particularly regulatory reporting, risk data warehouses and case management tools. Some impacted if its ability to perform notable mentions from North America in that list were IdentityMind, Quarule, cross-border payments isn’t Tradle and Trulioo. protected through negotiations. The recent actions of the FCA, North America generally plays catch-up with Europe in regulating FinTech, including its New Bank Start-up focusing heavily on small business lending protections, consumer fairness and Unit initiative and issuance of privacy concerns. However, North American’s regulatory position is evolving. licences to mobile-only banks Atom and Tandem, now stand in In May 2016, the Competition Bureau in Canada began a market study into question for Europe as a whole. technology innovation in Canadian financial services to assess competitive impact and regulatory needs. During June 2016, both the Federal Trade Commission and the Office of the Comptroller of the Currency held public forums in Washington, DC, on cultivating innovation in FS, with a heavy focus on marketplace lending. These forums and studies ultimately are meant to spark a discussion similar to the European Banking Authority’s paper on consumer data and FinTechs, and they help to establish a regulatory framework for the industry. An effective means of better understanding the ever evolving RegTech landscape is by utilizing the DeNovo platform. DeNovo cuts through the FinTech noise to deliver proprietary content, insights and research married with access to a dedicated team of subject matter experts to help understand and design better business strategies built on innovation. The changing landscape 4 How to use RegTech and make regulatory compliance your strategic advantage

How can RegTech transform core regulatory processes? The key difference between a traditional solution and a We expect RegTech solutions to be primarily based on one of RegTech solution is agility. RegTech solutions are more the following four dimensions: nimble, flexible and aren’t built on ‘locked-down’ requirements 1) Efficiency and collaboration as typically seen in more traditional solutions. In addition, 2) Integration, standards and understanding RegTech solutions tend to be flexible and cloud based, which means data is remotely maintained, managed and backed 3) Predict, learn and simplify up, resulting in more scalable and flexible performance with 4) New Avenues reduced costs. As the RegTech phenomena matures, we believe that it will help drive convergence within control functions as many tasks can now be automated thereby reducing operational risks associated with meeting regulatory compliance reporting obligations. This is only the tipping point of efficiencies offered by RegTech. RegTech Phenomena: Various domains of RegTech solutions and how this will transform Financial Services Efficiency and collaboration Integration, standards and Predict, learn and simplify New avenues understanding Semantic tech & data point Alternative reporting methods models Risk & compliance monitoring Blockchain/distributed ledger Create more flexibility Machine-readable Identifying real-time risk/ Blockchain could for firms to provide their regulation allows more fraud through correlating improve system integrity regulatory data and automation and can multiple sources of while increasing reduce the cost and significantly reduce the information and using transparency and could burden of regulatory cost of change, ensuring powerful calculation transform processes reporting greater consistency engines could reduce risk and redefine how data between regulations and and false positives is shared implementation Unified risk assessment Application program interface Machine learning Biometrics Shared platforms among APIs encourage Allows systems to Biometric technology second line of defence integration and automatically reassess measures people’s functions enable interoperability between and refine processes in physical characteristics common approaches systems and help reduce reaction to input from and could allow more and documentation costs, increase efficiency users, replacing firms’ efficient and robust of various risk- and and provide platforms for more complex high- ways to verify identity regulatory-related data innovation volume and repeatable elements regulatory tasks Cloud computing Shared data ontology Big data analytics & modelling Inbuilt compliance Enables more efficient Sharing a common Using big data analytics An automated, system- data sharing and understanding of the across multiple data based rule set that can collaborative, remote structure of regulatory sets could enable new automatically apply access, among others, data improves efficiency, insights and support more regulatory strategies which can assist reduces costs, eases informed decision making, to updated regulations teams in coordinating interactions and helps reducing the burden of can reduce overall risk assessment and remove ambiguity regulatory reporting compliance costs reporting The changing landscape 5 How to use RegTech and make regulatory compliance your strategic advantage

What are the next steps as we explore and embrace RegTech? PwC continues to RegTech provides the industry with multiple new opportunities and enhance capabilities solutions that enable efficient and effective regulatory compliance in RegTech management. We see the following next steps as crucial for organizations to thinking about using RegTech solutions: 1) PwC Ireland and Irish RegTech 1. Understand your existing regulatory technology company ViClarity teamed up capabilities: Many organizations already have regulatory- and to develop a compliance risk compliance focused technology in place, whether that’s a governance, management tool, which tracks risk and compliance system or automation built into their client the performance of governance, on-boarding processes. it’s important to catalogue and understand risk and compliance controls and delivers a full accountability the current capabilities and a long term vision for your regulatory trail, all in state-of- the-art user technology needs before embarking on a search for RegTech solutions. experience with comprehensive, Organizations should evaluate current landscape to assess how real-time and periodic reporting. RegTech fits into their long term strategy. 2) PwC UK partnered with Bank 2. Understand the current RegTech solutions in context of your of England’s (BoE’s) FinTech needs: Based on the assessment of your current environment and accelerator. A team of PwC engineers and specialists in evaluation of your emerging needs, you should be able to identify the testing worked with BoE to gaps in your regulatory technology infrastructure. Keeping these in design and carry out a proof context, use tools like DeNovo or other market evaluation methods of concept to explore the to gain understanding of the RegTech solutions that can benefit your potential opportunities and organization. challenges of using distributed ledger technology for payments 3. Establish a program to develop implementation plan: In settlement. order to gain strategic advantage from your regulatory compliance 3) PwC has partnered with technology investment, we recommend treating the role of RegTech in Paycasso to use its biometrics your organization as a distinct, structured and well funded program. technology to help financial Too many times organizations try to address such vital initiatives institutions protect themselves through “the side of their desks” without devoting the resources, against financial crime and senior management support and program structure that it deserves. meet their legal and regulatory We believe RegTech can be a game changer for your regulatory obligations to know your technology environment. Therefore, it’s imperative that organizations customer. Paycasso’s identity and access verification create a project team dedicated to this initiative and develop a solutions combine biometric RegTech implementation road map which aligns to the strategic vision computer vision with document of your organization. and fraud detection algorithms to give its enterprise clients confidence customers are who they say they are. Just as important to its clients is the consumer experience. If a process is complicated and time consuming, potential customers will simply stop and go elsewhere. The changing landscape 6 How to use RegTech and make regulatory compliance your strategic advantage

Contacts To have a deeper conversation on this topic, please contact: Jason Boggs Partner and Leader, Financial Services Consulting Group +1 416 941 8311 jason.boggs@pwc.com Sandeep Dhiman Partner and Leader, Financial Crimes +1 416 687 8142 sandeep.dhiman@pwc.com Rani Turna Partner and Leader, Financial Services Assurance Practice +1 416 869 2406 rani.turna@pwc.com Michael Reystone Director, Financial Services Risk and Compliance +1 416 869 2349 michael.m.reystone@pwc.com Contributing authors include: Niraj Borkar, Sulalit Das, Akshay Verma and Liz Warner. www.pwc.com/ca/fs This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.© 2016 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. © 2016 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 257773 1216VN