Supervising Tomorrow

Financial supervisors and regulators face complex challenges as the industry evolves at an increasing pace in a digital world. Technological advances, changing customer preferences, new business models, and major regulatory initiatives are contributing to the vertical unbundling of traditional value chains and the blurring of regulatory perimeters.

TRENDS IN FINANCIAL SERVICES SUPERVISION

^{* Other responses: “Geopolitical change”, “Asset bubbles/indebtness”, “Fragmentation”, “Banks competing with non-banks driving up risk profiles”

Source: Oliver Wyman “Future of Supervision” Survey, 2018}

These trends bring in new risks and additional challenges for supervisors. But they also represent opportunities to rethink the current supervisory model, remove inefficiencies and create a nimble, intelligence-led approach to supervision.

Many have started moving in this direction already, but they still have a long way to go. We expect the remit and practices of supervisors to change significantly over the next decade. While implementing change is always challenging, starting this journey now will allow the supervisor of 2025 to keep pace with a rapidly evolving industry.

SUPERVISORS FACE A CHANGING ENVIRONMENT

We surveyed about 60 financial authorities around the world about new industry trends and their likely impact on supervisory and regulatory processes. More than 60 percent of respondents indicated that they expect industry trends to change the traditional risk based approach to supervision. Though varied, their responses clearly point in one direction: Financial supervisors oversee an industry that is transforming rapidly, and they anticipate this will have a profound effect on the way they operate.

SURVEY RESPONDENTS EXPECT MEANINGFUL CHANGES TO SUPERVISORY MODELS

^{Source: Oliver Wyman Future of Supervision Survey, 2018}

The overall finding of our survey is clear: the need to change (driven by the industry) combined with the ability to change (enabled by advances in technology and analytics) will result in transformed supervisory models by 2025. We identify five broad areas of likely change.

1NEW ACTIVITIES

As the industry becomes “modular”, with many firms competing in small parts of the value chain, we expect supervisors to increasingly attend to activities (such as payments or credit provision) alongside their traditional focus on entities (such as banks). Supervisors’ remits will need to be systematically reassessed in light of a continuously shifting regulatory perimeter. A matrix form of supervision is likely to emerge, balancing increased horizontal focus with sufficient entity-level accountability.
2ADVANCES IN SUPERVISORY TECHNOLOGIES

Advances in supervisory technologies (SupTech) provide supervisors with an opportunity to improve the quality and timeliness of risk identification and monitoring. Using advanced data gathering and analysis techniques, certain areas of supervision will use “real-time” monitoring of key risk indicators (KRIs) and early warning signals, enabling more frequent early intervention on emerging risks. Current practices, based on data samples and expert assessment of processes and methodologies, can be gradually replaced by a population-based, “full picture” view of firms’ behaviors and practices.
3INCREASED ENGAGEMENT WITH THE FINANCIAL ECOSYSTEM

To understand the financial ecosystem for which they are responsible, supervisors must engage more actively with it, drawing on the knowledge of the various participants and subject matter experts to develop their supervisory and regulatory approach. The increased speed of change and nature of digital activity means supervisors can no longer rely on period-end regulatory reporting and thematic reviews to identify risk, as the time lag is too long. Proactive and ongoing engagement is needed instead.
4INTERNAL REORGANIZATION

These new approaches to supervision will require internal reorganization, with teams focused on activities (such as payments and lending) and technological skills (for example machine learning, AI and cyber), and not just the entities covered. New skills will be needed too, with traditional skills in economics, finance, compliance, and governance, being augmented by competence in data science and analytics, and by relationship skills to support interaction with the ecosystem.
5BECOMING DIGITAL

Like the ecosystem(s) they oversee, supervisors expect to become increasingly digital. This will allow them to synthetize the vast quantities of structured and unstructured data they will be collecting and analysing. It will also increase their internal efficiency while reducing the procedural compliance burdens on supervised firms. Some supervisors are already exploring this, with integrated data utilities (for regulatory reporting, AML, or credit information, for example) and machine executable reporting (such as smart contract technology).

As always, transformation will be challenging. Regulatory frameworks will need to be revised. And authorities will face a range of pressures, differing by jurisdiction, arising from their changing mandates, institutional fragmentation, and regulatory “Balkanization” aimed at protecting national interests. The difficulty authorities face is not primarily in the development of new supervisory techniques but the ability to push these from the innovation teams to business-as-usual supervision. Nevertheless, many supervisors are starting to move in this direction, and we expect all major markets to undergo significant change in the supervisory model over the next decade.