RegTech, a business as usual breakthrough
Cynical observers of legal practice might marvel at the capacity of lawyers to enshroud their trade in complexity and conclude this trait might have been the source of such sustainable revenues over a long time.
It’s not a new observation. And it’s not without its supporting evidence, albeit circumstantial.
As a legal practitioner turned RegTech provider, this is what I see:
- Corporate business processes – doing a deal, releasing marketing communications, sourcing raw materials, selling finished products … all these occur as straightforward business as usual activity. They typically don’t make any routine call on experts, say, in foreign currency exchange, insurance risk, import / export or logistics. But they all too often do call on experts in the law.
- Lawyers remain locked in a furious cycle of reactivity, called in late to get up to speed, review documents, master details and lend their perspective on commercial transactions. Only then sometimes to be sidelined especially if they have made too many demands on the deal.
- Business executives who are perfectly capable of sorting out a vast range of business challenges are often incapable of managing legal ones. In my experience they will run a mile to avoid getting involved in a detailed assessment of legal impacts and will make a point of calling in the legal cavalry in an instant in preference to weighing up legal issues themselves. (When they don’t call on lawyers, they still prefer not to engage in the legal stuff themselves.) The same goes for most team members: the thought of the law or a legal review is anathema.
- Business itself is the casualty of this perverse tentativeness on all matters legal. Dealings that warrant proper alignment between business goals and legal parameters go bad because of systemic failure to address the law. Or they cause too much bother because of systemic over-handling by expert legal intervention.
So, we end up with what we have: a lumpy approach to lawyering for business where expert lawyers are either brought in routinely, pushing deals into overdrive and sometimes over the edge, or they are bypassed, denying the business legal protections and possibilities, and imperilling outcomes.
I have seen this problem throughout a 15 year career in private legal practice. What I’ve learned over the 15 years since starting a RegTech solutions business is that the problem is far worse and more widespread than I realised back then.
Here’s the thing.
The law is an intellectual discipline. The lawyers who practice it are particular experts in ‘where to draw the line’ and how to justify doing so.
But most day-to-day business does not require forensic line drawing. It requires a secure path with clear guide posts. The genius of a high powered lawyer just should not be required on a ‘business as usual’ basis.
This is not just a matter of logic, but of cost. The true transaction costs of involving a lawyer are frankly stratospheric. I’m not talking about the lawyer’s costs – they are relatively trivial. The real cost is to speed, agility, momentum and ultimate success of commercial effort. Forcing a key transaction off the fast lane freeway is a huge blow to business, not merely in terms of efficiency but in loss of opportunity.
Consider reiteration rates. A commercial manager knocks up a rough ‘heads of agreement’ and shares it with 3 or 4 colleagues in Legal, Tax and Commercial. Suppose it goes through 4 rounds of redrafting with associated red ink. The added cost? About $10,000 in actual people time. About 2 weeks spent not closing the deal. About the value of the whole bargain if the delay means a lost deal.
So, what does RegTech have to offer as a solution to this problem? This is a particularly important question because RegTech has been criticised for being a solution looking for a problem. How wrong that is: the problem is stark.
Well, firstly, the problem lies with the business mission. In my view the best solution serves the business, not legal practice. So much RegTech (and LegalTech) appears designed to assist the expert practitioner … the intermediary. RegTech comes into its own when it serves and helps solve a much much bigger problem – how to do better business – and when it targets non-experts as its core users.
The numbers supporting this are illuminating. I know of a financial services organisation that required legal review and approval of every marketing output. When they introduced a marketing compliance review solution, they expected to reduce compliance time-cost by 10%. They did better than that: they reduced it by 92%. Because the solution was effective in co-opting the whole marketing team in compliance review, they achieved overhead cost savings of $1,000,000 per annum.
Secondly, RegTech must operationalise the law, making it quick, easy and highly effective to fulfil legal requirements within the larger reality of the business domain.
Thirdly, bare automation that proceduralises legal precepts is just not enough. The qualitative and quantitative miracle of AI married with big data and smart business rules will increasingly support and substitute the human judgment call. It’s critical that digitalising the law addresses the interpretative layer and does not rest on black letter legal rules: the tools are now at hand to do this. Good judgment remains a critical ingredient for now, but must be informed by the best technology has to offer.
The goal of RegTech is highly disruptive but it’s a different kind of disruption. Truthfully it aims to disappear the legal and compliance issues – to reduce the overhead investment cost but not the effectiveness. It’s to make compliance a business as usual expectation – and to ensure relentless realisation of that expectation.