Due to the complexity of regulations and their diversity in different jurisdictions, organisations look for innovative solutions which can help achieve their business objectives while reducing risks.

RegTech focuses on standardisation and automation of regulatory processes to deliver higher quality at a lower cost. It has subsequently earned great adoption in financial and regulatory sectors, but other industries benefit from it as well.

The UK regulator FCA describes RegTech as “the adoption of new technologies to facilitate the delivery of regulatory requirements”.

The History of RegTech

Numerous interrelated events have driven fast RegTech development.

First, the Information Technology boom opened new opportunities in the financial sector. The rapid growth of FinTech and use of consumers data to produce digital products led to new and heavy regulations regarding data privacy, data protection and encryption.

Following the 2008 credit crises, regulators issued penalties for non-compliance which exceeded US$200 billion. Heavy fines forced banks to invest more in their compliance processes and risk management.

Regulators around the world are in open dialogue with financial institutions and professionals. The objective is to promote innovation and create compliance standards to help RegTech firms develop solutions.

In the last 5 years, global RegTech investments surpassed $1bn and continue to grow, according to research from FinTech Global. In terms of capital invested, funding has increased from $923.4m in 2014 to $4,484.5m in 2018.

How RegTech can help

RegTech can create sustainable and scalable ways for institutions to conduct a variety of compliance functions:

• Automation of customer onboarding
• Customer identity verification and management
• Real-time transaction monitoring
• Improved fraud control
• Secure financial information
• Control over internal business processes
• Tracking, analytics and scanning of regional and country regulatory changes
• Proactive identification and reporting of regulatory risks
• Automated mapping of regulatory risks to key business processes
• Leveraging big data to extract market and customer insights

In the short term, banks and FinTechs can automate some of the compliance tasks, reduce operational risks, keep up with regulations and meet reporting obligations to remain compliant.

Although some regulations have become international standards, e.g. the Financial Action Task Force (FATF) has developed a set of Know Your Customer (KYC) rules, they tend to be implemented differently from country to country.

KYC-Chain can help to minimise this complexity with an all-in-one software, which provides flexible configuration options for the customer onboarding process and tools to streamline the compliance workflow.

It’s worth noting that failing to meet strict jurisdictional compliance requirements can result in severe fines and penalties. Examples include Deutsche Bank, which has paid $14.6 billion in fines, and US Bancorp, which was forced to US$613 million for it’s alarming AML errors.

Besides the hefty fines, it’s important to understand that the convenience and overall customer experience also suffer from the complexity of regulations. Since there is no one global payments standard, banks tend to overcomplicate cross-border transactions.

But with the assistance of RegTech companies, like KYC-Chain, banks can verify identity of customers and screen payment transactions in real-time.

In a long term, RegTech will “contribute to developing a more transparent and controlled global financial system, making it harder, if not impossible, for a financial crisis to occur as a result of deficiencies in this area” — Javier Sebastián, Digital Regulation Manager at BBVA Research.

What are the problems with RegTech?

However, as Deloitte pointed in the “RegTech is the new FinTech” paper, even though the RegTech development is promising, current solutions cannot cover all compliance challenges. For now, it proved to work well with information-based obligations and risk identification and management tools including:

• Legislation/regulation gap analysis tools
• Compliance universe tools
• Health check tools
• Management information tools
• Transaction reporting tools
• Regulatory reporting tools
• Activity monitoring tools
• Training tools
• Risk data warehouses
• Case management tools

How do different countries handle RegTech?

RegTech has to be fully supported by governments and regulators around the world to be successful. A number of countries have already introduced initiatives to promote innovation in the financial sector:

• In the US, the Consumer Financial Protection Bureau (CFPB) promotes innovation, competition, and consumer access within financial services under the Project Catalyst.

• In the UK, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are actively supporting RegTech adoption.

• In Australia, the Australian Securities and Investments Commission (ASIC) launched the Innovation Hub to provide practical support to startups as they navigate Australia’s financial regulatory system.

• In Japan, the Financial Services Agency (FSA) has launched the FinTech Support Desk as a point of contact for inquiries and exchange of information on FinTech.

• In Singapore, the Monetary Authority of Singapore (MAS) has set up a new FinTech & Innovation Group (FTIG) to facilitate the use of technology and innovation to better manage risks, enhance efficiency, and strengthen competitiveness in the financial sector.

What makes RegTech special?

The key difference, based on the Deloitte report, between traditional solutions versus RegTech-era solutions is simple — agility. While traditional solutions are robust and custom made to suit business needs, RegTech provides greater flexibility and speed of implementation through the following technologies.

Most tools are cloud-based, which enables quick and secure collaboration and data sharing between different entities, including financial institutions and regulatory bodies.

Also, keeping the infrastructure in the cloud significantly cuts the costs to maintain, manage, backup and protect this data.

As the Deloitte report continues, “data is meaningless unless it is organised in a way that enables people to understand it, analyse it and ultimately make decisions and act upon it.” Thus RegTech solutions have developed tools to understand and interpret unstructured data, utilising artificial Intelligence, machine learning, deep learning and data visualisation.

Other applicable technologies widely used and supported by the industry are electronic identification and verification (ID&V), biometrics, adverse and social media searches, application programming interfaces (API) and blockchain.

Conclusion — What is RegTech

In this article, we covered the RegTech industry, what problems it solves and where it’s headed. If your organisation struggles with regulatory and compliance processes, you should consider investing in RegTech solutions.

RegTech represents more than just an efficiency tool and rather is a pivotal change leading to a paradigm shift in regulation.

– Arner, Douglas W. and Barberis, Janos Nathan and Buckley, Ross P., FinTech, RegTech and the Reconceptualization of Financial Regulation (October 1, 2016).