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Politics and RegTech Make Strange Bedfellows

The United States does have a bit of a reputation for being Ameri-centric which is greeted by the rest of the world with either total nonchalance or a bit of chiding. However, what is undeniable is the ripple effect of their politics and regtech on the financial markets around the globe. If a Republican is seated in the Oval Office, regtech can relax for four years. But, if a Democrat is residing in that storied house, it’s a different story. With President Biden now in office, get ready – the pace of regtech is probably going to become fast and furious.

A Historical Perspective

Wall Street has different relationships with Republicans versus Democrats which tend to be more relaxed with the former. One would think that those relationships are related to stock market performance and that, perhaps, one party has a better track record when it comes to investment returns. Not so: a recent analysis conducted by Forbes shows that it doesn’t always matter. As it turns out, good investors make healthy returns on their money regardless of who’s in the White House.

But if you’re not a good investor and if you’re a compliance officer or trader, it’s a different story. If history tells us anything, there will likely be increased regulation under President Biden.

Build, Tear Down and Rebuild

That’s essentially the cycle that’s on rinse – repeat each time the Oval Office switches its political party affiliations. We’re all aware that the U.S. President appoints people to critical positions such as the head of the Department of Commerce, Chair of the Federal Reserve, and so on. Naturally, whoever is chosen to fill those roles is going to leave their imprint on the associated laws and policies of the office they govern.

Under former President Trump’s tenure, members of his cabinet dismantled some aspects of the Dodd-Frank Act (enacted in the wake of the Financial Crisis of 2008-2009 to afford consumers with greater protection). His team did so by invoking the rarely used Congressional Review Act (which bypasses voting in the Senate) to expedite the dismantling of more than 250 regulations. Now that a Democrat is the Commander in Chief, experts believe that many of those regulations will be reinstated, potentially with even bigger “teeth” than they had before.

President Biden’s priorities are anchored in equal access to banking. To make capital more accessible – and equally accessible for all communities – the regulations will need to change and increased monitoring with more frequent checkpoints will likely be enacted. This has implications for regtech vendors, compliance officers and brokerages.

What about eComms?

Last year, when COVID crashed the office party, traders retreated to their living rooms. Of course, this instantly altered the role and the reach of the compliance officers, plus it put financial firms on notice. Almost overnight, financial firms were faced with a new kind of crisis – ensuring compliance through sustained monitoring, analysis and reporting efforts – but doing so outside of their controlled office environments. The pressure to continue trading and recovering investment losses never dissipated. Nor did the obligation to meet compliance standards.

But it felt like everything had relaxed. Why? Under Trump, the CFPB was more-or-less inactive, “demoralized and weakened” with only 27 enforcement actions versus the average 46. Expect that to change in favor of strengthened consumer protection. Biden has always been a staunch supporter of the Dodd-Frank Wall Street Reform and Consumer Protection Act, even back in the days of President Obama’s leadership.

Recent events, including the acquittal of the Russian banker who deleted his WhatsApp messages in front of the London police officer that was arresting him, are likely going to spur some overdue changes when it comes to monitoring e-Comms. On a positive note, the Biden administration is expected to favor and encourage innovations in fintech and regtech that increase consumer protection – and that’s good for startups at large, and RegTech specifically. As the U.S. enacts changes, so, too will the rest of the world follow suit as every financial market globally desires to trade with Wall Street. International regulators often emulate the policy changes led by the Americans.

Here, “emulate” is the keyword. It’s rare that you see regtech directly copy U.S. financial guidelines. And therein lies the challenge for international financial firms. Subtle differences and frequent changes to regulations can leave compliance officers spinning and blind-sighted if they don’t have reliable compliance solutions that flex in accordance with the changes.

We are anticipating a fairly big spike in eComms regulations given how prevalent they have become in this pandemic world. Even if we “return to normal” sometime soon, it is unlikely that we will revert back to our old ways of working and trading exclusively in controlled environments and using only our approved telephones. That’s not likely. Instead, expect more e-Comms solutions to launch and even more channels for traders and clients to interface on and exchange messages within. Legacy compliance solutions simply cannot keep up. And the arcane practice of archiving messages will likely create a few wrinkles for those who follow the practice of doing so. Increased regulations may include longer historical reviews and hence, may force compliance officers to retrieve old messages and other data from their archives. That’s not a straightforward process. Data storage formats have been changing rapidly in the last couple of years. Comprehensive analysis of the extended dialogue between traders or traders and clients that have been flagged as “suspicious” will be both tedious and challenging if archived contents are involved. Despite the push from COVID, many financial firms continue to resist digital transformation.

Changes Ahead

Manual processes have begun to fall out of favor. With regulations changing as quickly as they do and with increased scrutiny of trades between financial markets, we expect to see greater automation. This allows for increased efficiency and improved maintenance, as well as reduced costs, versus manual processes which have to be fully reworked each time a regulation changes.

Additionally, the FDIC has already begun making changes that will impact how banks, fintech, and regtech companies collaborate and compete. Biden’s team is expected to put renewed attention on insider trading, accounting fraud, issuer reporting, foreign corruption and other forms of misconduct typically which weren’t a priority of the Trump administration. So, how do you prepare for the changes that may be ahead?

Choose digital transformation and warehousing data versus archiving it. Doing so will still enable encryption and sovereignty of that data to protect it from tampering. Accept that your traders and their clients will communicate on various social media, DM and other channels. Select one, or two such channels and craft clear policies – and system monitoring protections – around their use. If it’s time for a regtech software upgrade, consider one that can flex and analyze disparate data types.

When it comes to auditing and updating your existing compliance policies, there is no time like the present to do so. Where do you begin? Start with all the regulatory rollbacks authorized under Trump. You can bet that at least some – if not all – of those rollbacks will be reversed as is the tradition when U.S. political parties swap residency in the White House.

Although it may be hard to predict which changes are coming, you can bet on one thing – there WILL be change.


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