ch&co - supporting the development and adoption of regtech

CHAPPUIS HALDER & CO.

FCA – RegTech

Call for Input: Supporting the development and adoption of RegTech

January 2016

Stephane Eyraud [email protected] Heguy [email protected]

2CHAPPUIS HALDER & CO.

Objectives of this presentation

Remind the context and objectives of the ‘RegTech’ Call for Input issued by the FCA

Provide our answers and insights to the questions in the Call for Input

Present Chappuis Halder’s expertise, especially in Regulatory and FinTech topics

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Chappuis Halder & Co. is willing to contribute beyond this answerby being involved in the workshops planned in Q1 2016


Agenda

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3 Presentation of Chappuis Halder & Co.

4 Appendix

Our answers to the Call for Input2


Context of the Call for Input

In 2014 the FCA launched ‘Project Innovate’ to ensure that its regulatory regime supports the development ofinnovative financial products and services for the benefit of the consumers. As part of this project, a Call ForInput has been issued in November 2015 to seek broader views on how to support the adoption of newtechnologies to facilitate the delivery of regulatory requirements – called ‘RegTech’

The UK wants to capitalise on the development and commercialisation of innovative financial services basedon new technologies (‘FinTech’) and become the world’s leading FinTech hub, leveraging its favourableenvironment: Position as a world-leading centre for financial services, with excellent financial services infrastructure Presence of a large and technologically sophisticated customer base Unique attractiveness in terms of capital availability, angel investors, welcoming and entrepreneurial culture

But in recent years regulation has increased and could be an obstacle to the development of innovation Financial firms have focused the major part of their resources on remediation programs to the detriment of

innovation A significant number of Fintech firms seeking FCA approval are reported to have withdrawn their application

due to the complexity and cost of the process* and despite the implementation of the regulatory sandbox

To prevent this, an effective regulatory regime is needed to support the development of new technologiestackling regulatory issues, to help financial firms: Better manage the regulatory requirements, reduce their compliance costs Ensure that regulations do not make processes difficult for consumers or limit innovation that could be good

for consumers

* Source: http://www.altfi.com/article/1425_authorisation_process_proves_too_much_for_some_platforms


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3 Presentation of Chappuis Halder & Co.

4 Appendix



Q1. What RegTech to introduce in the market? (1/2)

Q1 - What RegTech could be introduced in order to make it easier for firms to interact with regulators, at alower cost and administrative burden?

Interactions between financial firms and regulators involve three parts:A. Financial firms as the providers of regulatory information

In this regard, RegTech could be introduced to provide: Big data capabilities: advanced data parsing & analytics allowing financial firms to parse large and analyse

numerous databases of information, and then extract, compute and aggregate the relevant elements ofinformation to be reported in near real-time

Machine learning & predictive analytics could be used for real-time risk/fraud identification throughcorrelation of multiple sources of information

Automation: automating the manual reporting processes, and more specifically providing test robotscapable of running and presenting the results of stress testing

Programmable reporting: using of a rule-based language and interface, to build flexible reporting that canevolve with regulation

Visualisation capabilities: tools could provide advanced visualisations for better decision making andinformation sharing

Immutable records: in this regards, blockchain could provide innovative solutions (shared trusted databaseof transactions for ownership transfer, or identities for AML/KYC purpose)

Cybersecurity alerts: reporting data breaches and serious alerts to the financial firms community (as partof CISP - Cyber Security Information Sharing Partnership)

Third Party Risk Management: could act as service providers to financial firms in order to conduct duediligence, contractual provisions, compliance with privacy regulations, audit rights, etc. and possiblyexecuted through the blockchain technology


Q1. What RegTech to introduce in the market? (2/2)

Q1 - What RegTech could be introduced in order to make it easier for firms to interact with regulators, at alower cost and administrative burden?

B. Medium of communication (that should be part of the regulatory requirements)The minimum for UK regulators would be to provide dedicated reporting templates, as well as APIs for financialfirms to provide the required information (for an easy integration into UK regulators’ systems).UK regulators could go as far as providing a comprehensive platform – and might even consider being its ownRegTech - to push the regulatory requirements as well as gather the reporting from the community.

C. Regulators as the source of the regulatory requirements and controlsThis is covered in the Q2 question.


Illustration: landscape of existing RegTechs (non-exhaustive)See detailed list in appendix – slides 20 to 22

Data management/ Reporting Risk management

Compliance

RegTech

UK

UK

UK

UK

Ireland

Ireland

Ireland

USA

USA

USA

Europe

Europe

Europe

Europe

KYC / AML / Anti-fraud


We think the FCA should keep its independent position in the ecosystem, focusing on the improvement ofstandards and guidance:

Offer a more comprehensive and user-friendly online service allowing the RegTechs to register to enterthe market

Influence the local and European regulators to issue more readable and implementable regulations,providing standardised formats of implementable requirements (similar to the ‘SMART’ frameworks formanagement objectives: specific, measurable, attainable, reasonable, time-related)

Provide APIs for regulatory reporting as well as standard data sets when relevant (i.e. stress testing) Facilitate the emergence of common RegTech standards through the organisation of workgroups (part of

the present call for input) Provide core training for major regulations, that every member of the community could follow (online

platform) Organise the Cybersecurity Threat Intelligence for the financial community (already implemented

through CISP - Cyber Security Information Sharing Partnership) Cooperate in regulatory policy modelling to simulate the expected impacts of new regulations before the

legislation and/or simulate the concrete impacts of existing regulations Sponsor internships or research works on regulation and innovation in Finance in partnership with

selected universities

Q2. What role for the FCA?

Q2 - What role would it be most useful for the FCA to play in order to foster development and adoption ofRegTech in financial services, and what method would best suit this engagement?


Q3 - Are there any specific regulatory rules or policies that cause barriers to innovation or adoption of RegTechfor financial services (products or processes)? Please provide examples of when these rules or policies havestifled development/adoption and describe the impact (e.g. delay, abandonment of project, economic impact).We are also interested in hearing about regulatory rules or policies that may extend beyond the UK regulatoryjurisdiction including, for example, European or international policies and agreements.

As a consulting firm working for banks, we are not able to comment specific rules on the adoption of RegTech bybanks. But, from our engagements with financial firms, we have two observations:

The volume and complexity of existing and new regulations have had the unintended consequence ofencouraging banks to focus on compliance rather than innovation

Because of regulatory uncertainty, financial firms are cautious about innovation by developing newproducts and using new technologies

Q3. Policies causing barriers to innovation


Q4 - Are there any regulatory rules or policies that should be introduced to facilitate innovation and adoption inRegTech for financial services (products or processes)? Please provide examples of when the absence of theserules or policies has stifled development/adoption and describe the impact (e.g. delay, abandonment of project,economic impact).

In connection with the two observations mentioned in our response to Q3:Volume and complexity

We agree with the Treasury proposal, in Fixing the foundations: creating a more prosperous nation thatthe regulators should seek to achieve a better balance between regulation and competition / innovation.

Regulatory uncertainty The regulations were developed for a branch-based banking system, with banks developing their own

technology. We suggest that the regulators should be reducing regulatory uncertainty by giving guidanceand expectations regarding the use of online systems and external suppliers of new technologies.

Q4. Policies to introduce to facilitate innovation


Q5 - Which existing regulatory compliance or regulatory reporting requirements do you feel would most benefitfrom RegTech?

All aspects of regulation would benefit from the introduction of RegTech: AML/KYC requirements: start-ups could provide innovative solutions for the implementation of systematic

and consistent KYC solutions across the entire organisation. For instance Tradle proposes such a service overBlockchain technology

Automated advice (in the UK): start-ups could offer automated services that make customers’ assetallocation decisions easier while also lowering costs

FDSF (Firm Data Submission Framework): bringing a strategic platform that could aggregate all required anddocumented data to comply with stress testing requirements

Capital assessment / Stress testing (CCAR, AQR..): advanced analytics capabilities can be used to designmodels and evaluate how thousands of variables impact banks

Trading book risk management (Volcker, MiFID, ...): algorithms could help control the margin requirementsfor each transaction and manage the market risk of the traders' portfolio

Reporting (Basel, Dodd-Frank ...): there is an opportunity for start-ups to provide near real-time data analysisand custom reporting leveraging new technologies

MiFID II: as it will be illegal to pay for research via trading commissions, a kind of marketplace for equityresearch could be provided by FinTechs to investment firms to face the unbundling issues of this regulation

Solvency II: creation of a connectivity between asset managers and insurers through a fund data utility tomeet Solvency II Pillar 3 reporting and Pillar 1 asset data requirements

Q5. Regulatory requirements to benefit from RegTech


Agenda

Context1

Presentation of Chappuis Halder & Co.

4 Appendix


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CH&Co. is a consulting company specialising in Financial Services.We are now serving clients in all of the major financial centres across the globe. Our main focus is on threebusiness areas: Corporate & Investment Banking, Retail & Private Banking, Insurance and Commodity Trading.

CH&Co. expertise is anchored in the deep sector and functional knowledge of our consultants; all of us have afinancial services background, and know the sector inside out. Because we do nothing else, and we operateacross the globe, we are able to bring a rich seam of best practice ideas and benchmarking data to our clients.

Hong Kong

Singapore

CH&Co. office

GenevaNew York

MontrealParis

Tokyo (Rep Office)

CH&Co. worldwide footprintA Financial Services consulting firm delivering strategic projects globally

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London


Our expertise in FinTech

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GET connected to the heart of innovation

Build direct contacts with innovators, to identify andunderstand new trends, with start-ups, investors, regulators,incubators in:

• London• New York• Singapore• Tel-Aviv

GET involved into innovation

Support innovative start-ups to improve their business models,look for investors, select best-of-breed service providers topropose one-stop shopping offer to our clients

• CH&Co. co-organised the start-up contest with InPayCo in Toronto(Mar. 2015) and Paris (Nov. 2015)

• CH&Co. sponsored the Fintech Connect in Dec. 2015 in London• Our consultants coach start-ups in Switzerland, Poland and London

(Start-Up Boot Camp)• CH&Co. co-organised exploratory trips to discover start-ups (last

one: Tel-Aviv in Apr. 2015)

GET ideas for our clients

Produce content / studies / overview / panorama to fuelbank’s innovation processes

Select initiatives, Identify potential benefits for banks,define the possible partnership in bank’s context

Realise benchmark studying best practices and new way tomanage projects

GET concrete feedbacks on innovation

Keep track of the various developments in the sector: newinitiatives, new ideas, main trends, etc.

Assess the success of the different new initiatives /technology with on-field tests, thanks to our internationalfootprint

FINTANK


Our expertise in Regulation

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Knowledge ofCapital Markets

industry

• CH&Co. has led numerous challenging projects within Capital Markets environment: Assistance in the deployment of new activities in investment banking, including in particular: equity

structured products, convertible bonds, structured deposits… Front to Back Office process redesign, Lean Six Sigma optimisation, Zero Base Budget program, workload

improvement…

• CH&Co. conducted a large number of regulatory projects across multiple locations: EMIR set-up of Reporting On Behalf and Unique Transaction Identifiers for a major French CIB Project management assistance on the implementation of EMIR risk mitigation requirements and follow-

up of Dodd-Frank Act requirements and communication/update to Front Office of a major European CIB Implementation of a monitoring and reporting program on Volcker Rule for a major French CIB operating

in the United States Value at Risk model homologation under the Basel II – Market Risk requirements and redesign of default

probability model and implementation of the related rating tool for Basel II – Credit Risk Deployment of new KYC repository, processes and workflow tools of a CIB group in APAC

• CH&Co. is currently implementing the FCA TR15/02 remediation plan on Structured Products within a majorFrench CIB in London

• CH&Co. has been involved in numerous complex international projects, and has a strong track-record ofProject Management in complex and international environments

Knowledge onregulatory topics

Excellent projectmanagement in

complexenvironment

Our experience

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CH&Co. has a unique position in the marketWe distinguish ourselves from our competitors through a unique positioning enabled by four key factors

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Moreover, the business model of CH&Co. is deliberately diversified to limit its dependency to clients or regions: 58% of incomes from Corporate and Investment banking, 29% from retail banking and 13% from insurance 56% of incomes from EU, 26% from Asia and 18% from US

Expert in Financial Services: A global managementconsultancy with dedicated expertise in financialfirms fuelled by our in-house research teams

Global reach, local solutions: Presence at the majorfinancial capitals to serve our international clientsand handle global projects with a local know-how

Innovation through pragmatism: our driving forcebehind long-term success, resulting in tailoredbusiness ideas and actual business results for clients

Committed to make things happen: A capacity todeliver projects from inception to implementation,from strategic planning to operational roadmaps

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CH&Co. capabilities: three main offers supported by three transversal centres of expertise

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Business Strategy

New Offers / Products

Partnerships(JVs, SSC, BPO, …)

Acquisitions &Post Merger Integration

Business Development & Innovation

Finance Function Effectiveness

Financial Performance(PCG, FX exposure, PNL)

Risk Management /Risk Control

Capital Funding& Balance Sheet Management

Risk & Finance

Performance Management

Target Operating Model design

Process Optimisation& Cost Reduction

Business ApplicationStrategy & Security

Business & OperationTransformation

Regulatory Compliance – Our experts are specialised in national and international regulationsRemediation Plans, IFRS, Basel II/III, Solvency II, EMIR, Dodd Frank (Volcker/IHC/CCAR/Resolution Plan), MiFid, FATCA, E-TradingKYC / Client Onboarding, AML, Vendor Risk Management

Digital – We work with out clients to develop their digital coverage by optimising media, launching new products, digitisingbusiness processes and transforming organisations, always with the end-user in mindFintech strategy, Process efficiency, Mobile/Online Product development, User experience & CRM, Market watch, …)

Global Research & Analytics – Our GRA experts help our clients to understand their data and turn it into actionable measuresRisk modeling, Client Segmentation, Portfolio Optimisation …

OffersCentres of expertise


Agenda

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Presentation of Chappuis Halder & Co.

Appendix


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Detailed list of existing RegTech startups (1/3)

Name Location Description

UK Detects disruptive events in global financial markets and anticipate price movementshours or days in advance of the event

Israel Uses machine learning and predictive analysis to find actionable news when the assetis not explicitly mentioned in the content

UK Prevents commercially sensitive information being sent to the wrong person

Ireland Analyses compliance risks in banks

Ireland Transforms how data is managed, processed and leveraged by the Funds Industry

UK Offers a cloud-based managed compliance service for asset managers, hedge funds,institutional investors

USA Provides risk management and anti-fraud services for the e-commerce ecosystem bytracking payments entities

Switzerland Allows easy exchange of KYC and Client Due Diligence data between financialinstitutions and clients

UK Allows traders to choose a CCP for an OTC derivatives transaction by understandingits margin requirements and manages the market risk of the traders’ portfolio

Netherlands Offers an alternative way for banks and investors to analyse credit risk, combining astatistical analysis of data with subjective opinions about forward looking risk

UK Automates the collection, verification and secure storage of customer due diligencedata and documentation




UK Delivers firm-wide risk aggregation, scenario analysis and risk data management

USA Uses Artificial Intelligence to automate and coordinate full-scale compliance and riskmanagement programs for value, accuracy and insight

UK Creates connectivity between asset managers and insurers, through a fund datautility in a secure and controlled environment, to meet requirements of Solvency II

UK Helps bank sort and source data, generate business intelligence and submit requiredregulatory reports without any disruption of current bank architecture

UK Offers granular behavioural profiling algorithms to automatically analyse tradingactivity for unusual behaviour indicating potential misconduct

Ireland Allows trade data tracking and risk alerts

USA Uses blockchain to build a KYC network to allow portability of KYC data, with full usercontrol

USA Provides instant electronic identity and address verification for individuals

USA Helps create and securely manage the consent to use customer personal data

Ireland Delivers individual, real time decisions for every one of your customers usingmultiple dynamic data sources

Ireland Enables the supervision of companies by a supervisor authority, such a central bank,financial regulator or tax authority




Ireland Offers integrated regulatory risk and compliance management solutions

Ireland Provides information security assurance and compliance validation services

SwitzerlandOffers a front-to-back toolbox which covers the entire investment process:regulatory compliance, client communication as well as quantitative analysis, riskmanagement, portfolio management and asset selection

UKProvides solutions for compliance officers and forensics teams that help detect casesof market abuse, fraud, collusion, sensitive and reckless behaviour early and conductinvestigations faster

UKHelps simplify, speed up, and improve the quality of compliance and anti-frauddecisions. It delivers due diligence and risk- scoring on both companies andindividuals

UK Provides the critical information to keep up-to-date with fast moving regulatory andlegislative developments across the globe

US Cloud-based marketplace program for research, financial info and apps, Airex Markethas a broader scope than addressing the research unbundling issues around MiFID II

Ireland Enables organisations to achieve regulatory compliance by conducting Know YourCustomer (KYC), Anti Money Laundering (AML) and Fraud prevention due diligence

France Offers a web-based marketplace for consumers of equity research to host digitallytheir shopping cart-library

UK Provides an FCA regulatory hosting umbrella for start-ups, FinTech and financialservices firms

ch&co - supporting the development and adoption of regtech

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