Thu. Jun 20th, 2019

Planet Compliance

Innovation & Regulation in Finance

What the heck is RegTech?

6 min read

In the world of startups and innovation in the financial industry Regulatory Technology or RegTech appears to be one of the hottest trends. In a recent report, Deloitte went so far to brand RegTech the new FinTech, which has made a massive impact on the financial services industry and according to a KPMG report attracted more than $19 billion in investments in FinTech companies globally last year.

So can we expect similar things from RegTech, is the revolution already under way and what actually is RegTech?

The Financial Conduct Authority of the UK defines RegTech as a sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.

Areas of disruption

One of the main areas for potential disruption through RegTech is the communication between different systems, be it internally between existing ones or with new systems, or between different institutions. Most financial institutions work with legacy systems that have been tweaked and amended over several years to become individual configurations that struggle to talk to other systems. A senior IT colleague ones told me that overcome these issues would be like a heart transplant surgery, where the old one basically needs to be removed first before the new one can take its place only that it would be like replacing several hearts at the same time.

However, new regulation and notably MiFID II is going to bring challenges, in particular with respect to reporting requirements and the management of data for firms and service providers that will make significant investments in technology inevitable.

Another key field of application lies in the management and analysis of the huge amount of data financial institutions hold. Compliance Monitoring for the purposes of fraud detection or suspicious activity from a Market Abuse, AML or CFT perspective are areas made for disruption by new entrants and old ones alike if they can come up with a better solution.

KYC and Due Diligence in general would welcome any product that would allow banks to access and manage their data more efficiently and streamline the current setup while saving money and resources on what is a now costly and time intensive process. The Blockchain technology could potentially provide an alternative since it is based on the concept of removing the need to trust a third party by trusting the network-agreed dataset, though it would first require clarifying a couple of privacy and security aspects. And it would obviously need a strong push from legislators and regulators to create the necessary regulatory pressure to change the status quo…

Compliance Training is also an area that could well do with a new approach. Regulators don’t get tired to stress that financial firms must make sure that not only do their employees have the skills, knowledge and expertise, but maintain these through regular training. Despite its importance, training is traditionally an area that receives little love, often considered to be a boring tick-box exercise or a waste of time that keeps staff from focusing on business. Gamification could be the answer to this problem though it might be tricky to strike the right balance to make it fun and rewarding but make sure it is still educational and comes with the necessary seriousness that a topic like AML or Conflicts of Interest require.

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There is certainly some money to be made. Compliance spending continues to increase and a look into the papers appears to reveal regulatory fines for compliance breaches on a week basis. According to a report from the FT, financial firms have paid more than $150 billion in fines, settlements and restitutions between 2008 and 2015 and regulators still seem to sit on a large pile of pending or potential cases. If Compliance systems can prevent some of the large fines alone, they are worth their money, but the value of technology solutions goes beyond pure costs and headcounts as Compliance Officers keep aching under the stress of responding to new regulatory initiatives and managing the requirements of existing ones. Any idea that RegTech companies come up with that would helps with these issues, is likely to attract a lot of interest and ready compliance budgets.

Outlook

Though dozens of startups and more established players have dipped their feet in the water or even have developed that bring significant benefits to its users, RegTech is still early hours. Development and adoption of the right products and services takes time and even if a financial firm is listening, technology traditionally isn’t an area where change happens over night.

Also, several drivers of a potential RegTech solution are still somewhat in their infancy and haven’t discovered their full potential. Blockchain and Distributed Ledger Technology are only in an initial stage of testing for applications beyond virtual currencies. While Big Data analytics already are at the heart of the RegTech revolution, Artificial Intelligence will continue to improve and could reduce the headcounts in growing Compliance departments.

To further advance RegTech, it will be important to create awareness in financial institutions of the benefits it could bring to the industry. The biggest challenge, however, is likely to sit with regulators who will need to be educated on technology and thus the communication between regulators, the firms they oversee as well as service providers and startups will be crucial. The UK Financial Conduct Authority’s efforts under its Project Innovate are therefore a step in the right direction. The regulator has aimed to bring interested parties to the table and gain a better understanding how the regulator can support the adoption and development of RegTech as part of the wider FinTech community. Based on its Call for Input, the FCA has announced that it will publication of its findings some time during the summer. Should be an interesting beach read…

 

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