The second wave of RegTech

Emergence of RegTech

RegTech (regulatory technology) emerged as a concept in the mid-noughties and was defined by the UK Financial Conduct Authority (FCA) as “a subset of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.”

Thanks to technologies such as artificial intelligence (AI), cloud computing and application programming interfaces (APIs), along with increased access to big data and lowered computing power costs, RegTech looks set to disrupt the regulatory landscape (again).

The global RegTech market is expected to grow from $6.3bn in 2020 to $16bn by 2025. In part this is due to the fact that in March 2021, the Financial Conduct Authority (FCA) added crypto companies to the list of businesses required to submit a financial crime report.

The RegTech sector has seen a fair amount of growth since the last global financial crisis in 2008. Regulatory changes that ensued from the crisis meant more sophisticated technological solutions – doing more than just a Companies House check or looking at the Charity Commission Register – have become necessary to satisfy new and complex compliance requirements.

On top of this, regulators have adopted increasingly smart tools to enhance the work they are doing too.

And then there was COVID

COVID-19 has super-charged the drive and demand for RegTech innovation. Changes to working practice and cost pressures associated with the current financial downturn have meant financial services firms have had to radically improve the efficiency of their compliance processes, systems, and controls.

According to think tank JWG, more than 1,300 COVID-19 announcements have been made internationally, thanks to regulators rolling out pandemic-specific guidelines and relaxing other rules to help financial institutions through the crisis.

The mass transition to remote working, coupled with rising consumer demand for FinTech channels, has seen an exacerbation of fraud and financial crime. According to the banking industry body, UK Finance, UK consumers lost a record £479m in 2020 to fraud. At the same time the Dedicated Card and Payment Crime Unit took down more than 700 social media accounts linked to financial fraud.

The second wave of RegTech is in prime position to help financial companies meet their compliance obligations, prevent fraud, create efficiencies, and save money.

Define RegTech?

Let’s rewind though. What exactly does come under the definition of RegTech?

Well, it covers the fields of regulatory reporting, risk management, identity management and control, compliance and transaction monitoring.

+ Regulatory reporting uses automated data distribution and big data analytics to enable real time recording.

+ In risk management, tech is used to test compliance, assess risk exposure, and anticipate future threats.

+ In identity management, RegTech facilitates counterparty due diligence and Know Your Customer (KYC) procedures as well as helping with anti-money laundering (AML), anti-fraud screening and detection.

+ RegTech is used for real-time monitoring and tracking of the current state of compliance and upcoming regulations.

+ In transaction monitoring and auditing, RegTech uses the benefits of distributed ledger through Blockchain technology and cryptocurrency.

RegTech in financial services

Highly regulated industries such as the legal sector, government, gambling and gaming, healthcare and energy are increasingly adopting RegTech. However, the largest proportion of RegTechs headquartered in the UK and foreign RegTechs operating in the UK are working in financial services, and more specifically in the battlefield of financial crime.

For instance, the financial services firms using PassFort’s SaaS RegTech solution orchestrate KYC, KYB and AML workflows, as well as the handovers between software and humans. Checks are automated, data providers integrated and the case management portal enables teams to collaborate. Risk-based decisions are automated and if that’s not possible the solution helps compliance teams prioritise, structure and complete their tasks efficiently.

Barriers to adoption

Despite RegTech solutions being widely adopted in critical areas and high levels of commercial optimism, it is not yet being implemented as widely as it could be.

Barriers to adoption include sometimes lengthy procurement processes by financial services firms, as well as a wariness of investing in new technologies that go beyond the norm.

A lack of buyer awareness and difficulties navigating internal decision-making, combined with legacy technology and budget constraints don’t make adoption any easier, especially for the larger incumbent financial institutions. Things are a little different for the cloud-native, nimble, FinTech start-ups.

According to a recent report from Thomson Reuters, even after substantial investment, only 14% of firms reported having complete confidence in their IT infrastructure. This is having a knock-on impact on trust when it comes to RegTech.

Trust is the linchpin of RegTech – it could not be more important. RegTech is about establishing trust online and about building trusted relationships with customers. Trust is so important because the cost of regulatory non-compliance is so high in terms of reputation, customer experience, and personal skin-in-the-game for your average MLRO.

There is another issue though, which the FCA has highlighted: RegTech lacks a genuine and robust industry representative body. The FCA believes this lack of a unified voice has hindered the industry and prevented it from working collectively, making it difficult for policymakers and regulators to engage properly.

A digitally enabled regulatory framework and regulators encouraging adoption, could make the difference, spurring vendors to investigate financial crime and compliance pain points that could be eased by RegTech innovation.

The next wave of RegTech

There is almost no doubt RegTech is the next big thing. It’s clear from all indicators that many millions of dollars, pounds and euros will be spent on RegTech in the coming years. That’s because RegTech helps fight the good fight against financial crime, as well as having the potential to predict it, and RegTech helps bring genuine customers onboard with financial products.

RegTech saves financial institutions money in terms of efficiency, scalability and growth, but it also creates better customer experiences and reduces drop-off rates.

The reason this wave of RegTech is big? Well, the way compliance teams work has changed. The way customers access and use financial products is different. The way regulation is implemented and controlled moves continually. There is real-time surveillance of the financial markets, the ability to predict risks and problems, and firms need clearer audit to establish trust.

We could go on…but, we can’t talk about the next wave of RegTech without talking about PassFort – a SaaS solution provider defining this next wave of RegTech.

PassFort is enabling regulated financial services companies to manage risk, trust, and compliance across their customer relationships.

Increasingly financial companies need to onboard, off-board and monitor customers at scale. There are multiple customer types, multiple product lines and different jurisdictions to consider. PassFort helps compliance teams tackle this complexity, to be more efficient and to build trusted customer relationships globally.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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