Over the last 5 years, we have seen the RegTech industry expand and gain more prominence as a sub-set of FinTech. The FCA’s definition of RegTech is the “adoption of new technologies to facilitate the delivery of regulatory requirements”. You might ask initially what all the fuss is about, given that technology has been playing a role in addressing regulatory requirements for some time. A key differentiator of where are now is the increased agility that RegTech technology is now allowing – financial services businesses are able to manipulate large datasets to create actionable information in a cost effective way.

Over the years we have seen RegTech technology develop from initial manual solutions used to capture data on software such as MS Excel into workflow automation, where simpler compliance tasks were automated, which reduced the underlying risk associated with them. Now we’re moving into more real-time solutions that allow continuous monitoring of compliance –rather than look at things through the rear-view mirror the financial services institution and the regulator can monitor in real time, and address issues in the same timeframe.

What are the drivers for financial services institutions to embrace RegTech? The sheer volume of regulation has increased substantially, which means that there is more scope for compliance gaps. Regulators are raising the bar on the reporting they want to receive, which strains manual reporting solutions. RegTech also offers significant benefits, including efficiency improvements,more accurate compliance reporting and overall cost reduction (even when the cost of technology procurement is factored in).

It is well known that financial institutions sit on vast lakes of data and often struggle to bring that data together in a way that allows them to generate actionable insights. This issue is compounded by legacy systems and data being in different formats. The benefits, however, of harnessing insights from the data are huge. For example, financial institutions can improve fraud detection rates, complete KYC checks to onboard new customers more quickly and reduce risk by using analytics to predict market behaviour.

Some of the challenges in RegTech adoption are not specific to RegTech and could apply to FinTech more generally and also to broader technology change in financial services. Legacy technology can make it hard to generate data in a consistent format and to “bolt on” new technology solutions. It is also important that the financial institution has appropriately skilled resource in system testing so that comprehensive tests are carried out at the right stage – the alternative is that issues are allowed to run on too long in the system development, and become harder to claw back. There are also cultural challenges, including ensuring that the “hearts and minds” of the those who will use the new RegTech solutions are won over.

One of the overall challenges with innovation and experimentation in technology generally is balancing that with the risk of it going wrong – the financial services sector has low tolerance for such risk: “Digital transformation requires a certain degree of uncertainty, experimentation and a ‘fail fast’ mindset. I think we can agree that these attributes do not always sit comfortably with prudent supervisors and risk-minded financial institutions” (Mitchell A Silk, Assistant Secretary for International Markets at the US Dept of the Treasury – March 2020).

Despite low tolerance for risk, it is clear that RegTech is an increasingly important tool in helping financial institutions manage risk, and arguably we may soon reach a tipping point where it will be riskier to try to manage the compliance landscape without RegTech solutions, and that fact will offset the risk of deploying them. A parallel can be drawn with the early concerns expressed by financial institutions around cyber security in the context of cloud computing, which can now be compared to a view that arguably cloud solutions are better equipped to address the ever-changing cyber threat than a financial institution’s on-premise datacentre solution.
The regulatory environment is evolving fast, which creates challenges both for financial institutions and for regulators themselves. RegTech can help to address those challenges.

It can also contribute positively to the strategies of financial institutions, helping them deliver safer, more efficient and compliant solutions to customers.

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Published on 23 August 2022