Innovations in RegTech

August 2024  |  FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

August 2024 Issue

Financial services regulation has expanded at an astounding rate since the financial crisis. Consequently, so too has the cost of regulatory compliance. What was once a rather nominal expense has become a material component of a firm’s annual spend.

Hence the emergence of RegTech – technology that helps financial services firms manage and meet their regulatory requirements. RegTech uses technology such as blockchain, machine learning and artificial intelligence (AI) to streamline regulatory activities. Its main functions are monitoring, reporting and compliance.

RegTech has empowered financial institutions (FIs) to automate compliance processes, significantly reducing the risk of human error. It reduces compliance costs, saves time and strengthens compliance infrastructure. At the same time, it enables FIs to stay on top of legal and regulatory fluctuations – a challenging and laborious manual task.

Though still in its relative infancy, RegTech has become one of the fastest growing areas of financial innovation and FinTech. The market is growing exponentially – according to DataHorizzon Research, it was valued at $9.8bn in 2022 and is expected to reach $47.7bn by 2032. Bloomberg reckons the RegTech market will grow to $19.5bn by 2026.

Following the global financial crisis of the late 2000s, regulators raced to mitigate risks to the stability of the financial system. According to Techmagic, there has been a remarkable surge in rule changes over the past decade, with a 500 percent increase recorded. A new regulatory update appears every seven minutes, according to Thomson Reuters’ Cost of Compliance Report.

The rapid pace of change within the regulatory landscape means that companies need effective digital tools at their disposal. FIs are leveraging a new generation of technologies, including AI, cloud, application programming interfaces (APIs) and robotic process automation (RPA), under the umbrella of FinTech solutions.

As a result of shifting regulatory sands, organisations are increasing their spend on RegTech and compliance as a whole. According to PwC, companies outlay between $1-5m on compliance for every $1bn they generate in revenue.

More and more organisations are dedicating resources to RegTech to navigate through the changing regulatory environment. FIs must remain aware of global regulatory changes and trends. This involves not only comprehending current regulations but also anticipating future changes and preparing accordingly.

Over the past five years, hundreds of start-ups have begun to apply digital technology to the numerous, burdensome tasks associated with regulatory compliance. Systems can be upgraded so they are capable of handling machine-readable and executable regulations, for example, though this may involve significant additional technology, as well as training programmes for staff.

The potential financial cost of a compliance breach encourages companies to invest in compliance. In 2020, global regulators imposed over $14bn worth of fines on banks, primarily for anti-money laundering violations.

In the US, adoption has been propelled, in part, by a rise in fraud cases. In 2022, the Internal Revenue Service collected $23.8bn due to late or incorrect tax returns. RegTech can help companies file returns on time and reduce penalties. Automation is also used to replace human resources and cut costs while minimising errors during routine tasks.

By freeing up resources as part of a digital transformation process, RegTech enables firms to strengthen their compliance processes, mitigate risks, increase efficiency, reduce fixed costs and improve customer protection. It can also provide valuable business insights, provide customers with better and faster service, and drive new products and services.

By adopting and integrating RegTech, companies can position themselves to thrive. Demand for new RegTech solutions will grow, creating even more opportunities for industry innovation and growth.

Going forward, RegTech solutions providers will need to maximise AI and machine learning technology while addressing concerns around data privacy and cyber security. Data analytics will continue to play a central role. As such, there will be a stronger emphasis on data quality and management, and a need for more sophisticated data analytics tools.

There will be challenges for the RegTech industry along the way. The flexibility needed to navigate the complex landscape of regulations is significant. FIs operate across multiple jurisdictions, each with its rules and compliance requirements.

At the same time, many FIs have entrenched procedures and legacy systems which may be resistant to change. A cultural revolution may be required – one which focuses on change management and budget allocation to risk and compliance departments, in addition to employee education programmes around the benefits of technological developments.

Going forward, RegTech will become more closely aligned with wider business processes, with a greater emphasis on data analytics and collaboration. By offering technological innovation and adaptive solutions to ongoing issues, RegTech will have a profound impact on financial services in the coming decades.

© Financier Worldwide

BY

Richard Summerfield