National regulators need to prepare. They need to recruit the best and brightest talent to stay in control and maintain oversight. But talent is scarce and expensive – and that’s where regtech can fit in.
The cost of new regulatory talent
Brussels think tank Bruegel estimates that about 3,300 positions at the top five U.S. investment banks and more than $2.1 trillion of assets might leave London. They estimate the total number of job losses in London will be 30,000, with some other organisations expecting it to be as high as 300,000.
Many countries in Europe will be vying for these jobs, and the range of cities positioning themselves to benefit is vast: Brussels, Dublin, Frankfurt, Paris, Prague, Luxembourg City, Vienna and Warsaw to name a few. But with a larger banking sector comes additional regulatory responsibility; the national regulators will have to take on more staff to make sure that they have sufficient oversight. They will all be chasing the same regulatory talent.
National regulators are now starting to tool themselves up. Ireland's central bank said it will boost staff numbers this year by almost 10 per cent, in part to deal with Brexit. Germany's regulator, Bafin, and the French central bank also intend to hire "dozens" of new people, according to reports from Reuters. Many other European national regulators will surely need to add staff too, and the numbers could be substantial.
But this race for talent is tough for regulators. Regulatory expertise is difficult to come by – and expensive too. Regulators often work within fixed, small budgets. So while some of the biggest banks can pay up to £400,000 for top talent, Daniele Nouy, the ECB's top regulator, earned just £250,000 this year. Nigel David, a headhunter at Charles Levick, said: "You are seeing salaries shoot up."
To compound this, the European Bank Authority (EBA) will also relocate from London – and it might be difficult to persuade all of its current employees to move to its new base, wherever that is. So, they’ll be competing for the top regulatory talent at the same time as national regulators are too.
A big new role for regtech?
Against this backdrop, regtech could emerge a winner. In the race for talent, regtech can stand up and step into the void. It’s a tool that regulators and compliance officers could use to fill this looming black hole.
But it’s easy to misunderstand this argument, or use it to create low-level panic. There’s a constituency who want people to see regtech as a threat to jobs. They want you to see regtech as a tool to create the cost efficiencies you need to strip out the human element.
But regtech is not something designed to replace human beings. It was created so that man and machine can become more powerful together. And this current talent crunch, where there’s literally not enough expertise to go around, can be tackled quickly by giving regulators new regtech-driven superpowers.
Regtech can help regulators generate insight that no human could discover. The latest AI can detect suspicious or frightening market patterns in real time. It can see things instantly and flag them up for further investigation by an officer. Or regtech can provide online spaces where regulators across different departments can share knowledge and expertise, helping us break out of a siloed mentality. Regtech can help regulators see things they had no chance of ever seeing before.
This also has implications for our regulatory infrastructure. This new vast movement of banks across Europe presents us with the perfect opportunity to collectively re-imagine regulatory oversight – and make regtech part of the system itself. Rather than see regtech as an add-on that can help regulators drive efficiencies we can make it part of the system itself; changing how things have been done and squeezing out new value that wouldn't have been possible otherwise.
I think this is what Transatlantic Policy Working Group on Fintech meant when it recently wrote that "[t]he first wave of regtech has focused on market driven process automation... The second wave of system evolution should also fundamentally reduce the cost and burden of regulation and will require a radical rethink of regulatory processes."
Using regtech to stand out from the crowd
National regulators will undoubtedly see the appeal of regtech. In their situation, who wouldn’t? But there’s another positive to being one of the first to adopt the latest regtech. The EU regulators that take a lead on partnering with regtech firms will encourage more to locate to their cities, creating clusters of regtech firms.
As cities vie for the attention of the big banks, these emerging regtech clusters can help set them apart; signaling to the whole financial sector that they are modern, future facing and understand how the world is changing – and exactly where it’s going. It also tells banks that there is a deep pool of financially literate tech talent in their city.
Having a wealth of regtech in a city will also position it for another big, important battle. The one between EU countries for the headquarters of both the European Banking Authority (EBA) and European Medicines Agency (EMA), both of which are expected to be awarded before the end of this year. A vibrant regtech community will help these cities stand out. Bloomberg recently reported that some cities were touting their paintballing and spa options – having a regtech cluster must surely be a bigger draw.
As the EU regulatory community tackles the difficult and challenging aftermath of Brexit, regtech is set to play an incredibly important role in the process.
Mark Holmes is CEO of Waymark Tech