Regulatory technology (“RegTech”) is an emerging field within the financial services industry that uses information technology to enhance regulatory processes. It places a premium on regulatory monitoring, reporting and compliance thereby benefiting the finance industry as a whole.
The term RegTech refers to a set of companies and solutions that merge innovative technology and regulation to address regulatory requirements across industries, including financial services.
The regulatory changes and technological developments following the 2008 Global Financial Crisis are fundamentally changing the nature of financial markets, services and institutions. This checkmate incidences of institutional failure to comply with demanding regulatory requirements. Regtech thereafter evolved to deal with changing dynamics of regulatory systems.
The recent focus on RegTech has been on the horizon since the dramatic increase in financial services regulations and financial crisis coupled with increased regulatory scrutiny in sectors such as financial services (regulatory breaches & misconduct) and even advertising (Facebook, Yahoo data breaches etc.).
Examples of regulatory technology applications are
1. Blockchain for seamlessly processing security transfers & transaction settlements
2. Monitoring & Surveillance systems using Big Data for fraud & misconduct
3. Natural language processing for interpreting legislation & automatically extracting requirements
RegTech is where FinTech is purposed specifically to address the requirement for financial services firms (banks, hedge funds, other asset management firms, stockbrokers, etc.) to be in compliance with all relevant, government-imposed anti-money laundering (AML) and know your customer (KYC) regulations and directives.
We have various aspects of RegTech that different classes of Companies deal with, I have classified them by their area of focus for ease of understanding;
- Regulatory Reporting e.g. Bearing Point is a leading international provider of innovative regulatory and risk technology solutions (RegTech and RiskTech) and services along the Regulatory Value Chain for the financial services industry
- Risk Management e.g. Cloud Margin which uses Cloud-based Software as a service (SaaS) workflow tool for margin and collateral management.
- Identity Management & Control e.g. Accuity which provides services for payment efficiency, compliant transactions, bank counterparty insight and AML screening
- Compliance eg Imadra.ai
- Transaction Monitoring eg Identity mind which uses Risk management solutions to track entities involved in every transaction
There are various AML/KYC directives in place across all global markets and in keeping up with this trends, human intervention alone is not sufficient to discover and report to the relevant authorities suspicious activity reports (SARs) or identify politically exposed persons (PEPs) and /or uncover whether the potential customer /corporation that a firm is considering ‘on-boarding’ is, for example, subject to political pressure (a PEP) or has previously committed fraud, bribery or any other form of criminal activity.
RegTech helps Financial services screen potential customers against official Sanctions and Enforcement Watchlists (of which there are 100s), PEPs databases and millions of media sources for adverse and negative media concerning the individual in question.
Financial institutions employ Heads of Compliance and Money-Laundering Reporting Officers (MLROs) whose main tasks are to ensure that their firms do not breach the relevant regulations. When breaches do occur, financial firms can incur very large fines from the relevant authorities and also suffer from significant reputational damage. MLROs are legally responsible for ensuring that such events do not occur.
Good, effective RegTech helps MLROs sift through large amounts of data quickly and efficiently, in order to ensure that they are in compliance with the relevant statutory regulations and are therefore not exposing their firms to the risk of prosecution when they ‘on-board’ new customers.
Because the task of running these checks against so many persons and /or corporations, each and every day, is simply too laborious and manually intensive for compliance teams to handle, RegTech is of a great assistance to them by dramatically reducing the need for human intervention by automating much of these screening processes.
Key Participants in the Reg Sector include
- RegTech firms
- Professional services firms
- Financial institutions
No segment in financial services is entirely independent. RegTech has significant overlap with the Identity, Data, KYC, Biometric, Compliance Training, Tax and Legal departments of the financial institutions.
Short Term benefits of Reg Tech
- RegTech can help to drive down the cost of compliance by simplifying and standardizing compliance processes through automated mapping of regulatory risks to key business processes, thereby reducing the need for manual and duplicate checks.
- RegTech utilizes sustainable and scalable solutions, allowing for flexibility and growth as business needs change. Firms can move away from rigid enterprise risk management systems once the adopted RegTech solutions are stable.
- Advanced data analytics allows regulatory information to be analyzed in various ways, including scenario analytics and horizon scanning for new regulations, thereby helping firms to proactively identify risks and issues.
- RegTech solutions, coupled with enterprise-wide governance, risk and control platforms, allow controls and risk frameworks to be linked seamlessly
Long Term benefits of Reg Tech
- RegTech will help to drive positive customer experiences. For example, a robust fraud detection platform could shorten the transaction life-span and improve consumer experience by reducing the number of false negatives.
- The same technologies that foster growth and promote customer experience can also be used to protect the financial health of institutions and prevent disruption of market agility and integrity.
- RegTech can provide greater confidence in meeting the board agenda on wider organizational governance, transparency and proactive reporting of risks and compliance.
- An expected application of RegTech will be to meet regulatory-driven data activities and support submissions to authorities. Early adopters will gain a competitive advantage by setting trends and gaining insights.
How Should Regulators Act?
RegTech solutions are being adopted by supervisors to cope more effectively with their new responsibilities and to inform policy development. RegTech enablement policies include digitizing regulatory handbooks, developing prudential reporting standards based around eXtensible Business Reporting Language (XBRL), and listing RegTechs complying with these reporting standards.
These approaches enable institutions to mitigate risk in selecting and working with new firms. Though regulators may not certify RegTech solutions, development of testing mechanisms such as sandboxes provide regulators with the opportunity to act as observers as part of a systematic validation of the effectiveness of new solutions.
Regulators should do the following in order to achieve success with RegTech
- Initiate Open Engagement: The relationship between the regulator and the regulated must undergo a transition to become more cooperative, rather than adversarial. There is potential to work together with governments, technology startups, academia, technology service providers and industry associations to understand how technology is evolving, what it means for regulators, and how its adoption can be accelerated.
- Begin Innovative Ecosystems: Creating the enabling environment requires regulators to work with ecosystem stakeholders and invest in digital technologies. Helping regulators in this journey are RegTech initiatives that work with financial authorities in select markets to strengthen and accelerate innovative capabilities.
- Test run Potential Solutions: Regulators should play a catalytic role in the development and adoption of RegTech solutions. There is merit in starting small by testing potential technologies, tools and solutions in a controlled regulatory sandbox environment, which allows regulators to engage entrepreneurs more quickly and at a lower cost.
- Transform Operations: The regulator of the future will be an analytics-driven organization with data scientists, behavioral scientists and technology specialists playing a vital role. Legacy systems will have to be replaced by more agile and cloud-first platforms. This will also mean embedding the voice of the customer as well as the regulated entities into the regulatory process and driving technological deployment to break organizational boundaries restricting the free flow of talent and ideas.
Regulators should look at ‘Regulation as a Platform’, which is defined as a holistic approach in which regulators collaborate with businesses, government entities and citizens to drive innovation and improve compliance outcomes. Made possible through capabilities such as machine learning and analytics, the platform makes it easier for business and government to understand and work with regulation.
Regulation-as-a-Platform can be a catalyst for the creation of innovative advisory applications. A good example is a Smart Advisor solution for regulators and business organizations, developed by Accenture Labs. The solution leverages technology tools — such as conversational agents, predictive monitoring, sentiment analysis and social risk analysis — to help officials at a regulatory agency or a business organization make better decisions leading to improved outcomes for all stakeholders.