RegTech rising: a regulatory revolution

January 2022  |  FEATURE | LEGAL & REGULATORY

Financier Worldwide Magazine

January 2022 Issue

No longer a buzzword, RegTech (an amalgam of ‘regulatory technology’) has graduated to become an established term in recent years – a timely transition given increasing global regulatory scrutiny, particularly of financial institutions (FIs).

As well as being complex and challenging, the regulatory environment is also a legislative minefield – a fast-changing collection of global and local laws and directives that place inordinate pressure on FIs to attain and retain compliance.

According to Deloitte’s ‘RegTech Business Cases 2021: Explore the tangible value of RegTech Solutions’, there were approximately 220 regulatory revisions for FIs’ compliance departments to keep track of every day in 2020. Moreover, non-compliance has resulted in regulators issuing more than $345bn in regulatory fines since 2009, heaping further pressure on FIs.

A plethora of new regulations and laws are also serving to up the regulatory compliance ante, with the likes of the new Whistleblowing Directive across the European Union (EU) and Germany’s Supply Chain Due Diligence Act, among others, providing new hurdles and looming liability risks.

To master this alphabet soup of legislation, FIs need to find a way to automate analysis, understand impacts, change business practices and processes and fine-tune reporting. To this end, they are increasingly turning to RegTech to help them meet compliance obligations set by regulatory authorities.

Essentially, RegTech automates repetitive tasks, monitors regulatory changes in real-time, generates reports and alerts FIs’ compliance staff to potentially fraudulent activity. Such automation allows compliance personnel to focus instead on high-value work that augments their role and increases organisational efficiencies. Powering RegTech are technologies such as artificial intelligence (AI), application program interface, big data and analytics, blockchain, cloud computing, machine learning (ML), robotics, smart contracts, and voice and text recognition.

In terms of capabilities, RegTech compliance solutions include regulatory reporting, risk management, regulatory monitoring, identity management and control, compliance, and transaction monitoring. RegTech can also help FIs reduce the time associated with operational risk and compliance processes, not to mention their not inconsiderable cost – a reduction Deloitte claims is between 30 to 50 percent.

“There is a broad range of RegTech solutions being used in the market,” observes Vaidotas Tamulenas, a bank expert at the European Banking Authority (EBA). “Across the EU, the RegTech landscape has undergone a vast transformation over the last five years, especially anti-money laundering (AML) and combating the financing of terrorism (CFT)-related RegTech solutions, followed by fraud prevention, prudential reporting, information communication technology (ICT) security and creditworthiness assessment use cases.”

Moreover, recent events have proven to be a catalyst in the uptake of RegTech. “The global pandemic was the watershed moment that forced firms to act,” contends Joe Norburn, chief executive of the TCC Group and Recordsure. “While automating middle- and back-office processes to manage risk more efficiently is not a new phenomenon, we have seen firms investing more in this area.

“Over the last 12 to 18 months, firms have been exposed to alternative communication channels but are not fully engaged with them,” he continues. “As a result, there needs to be new processes and controls in place to ensure regulatory compliance and fair outcomes for customers across all communication channels and at every stage of the customer journey.”

Boiled down, the upshot of this recent period of rapid change is a vibrant technology market and an increasing demand for intelligent RegTech solutions.

Barriers to implementation

While RegTech solutions strive to make regulatory compliance monitoring and risk reporting, among other things, a simpler endeavour for FIs, there are also particular barriers to implementation that FIs need to overcome.

According to the 2021 ‘Kalifa Review of UK FinTech’, although FIs have been looking into the potential benefits of digitalising their systems for a number of years, many have been hamstrung by a number of issues, such as the perceived costs and potential upheaval involved in implementing new systems. The report advises that providers need to make it clear that the adoption of RegTech solutions does not have “painful experience”; on the contrary, the benefits for the financial services industry far outweigh any upheavals that may occur.

“With the pace of technology acceleration across the sector, the need for robust compliance monitoring has never been more significant,” believes Mr Norburn. “But compliance monitoring at scale has always been a challenge, especially when firms need to ramp up operations quickly. It usually requires highly tailored ML model development, making it difficult to deliver a quick proof of concept if you are under time or budget pressure – which most compliance teams are.”

In the view of Mr Tamulenas, a number of challenges are holding back RegTech market development. “The main issues relate to the quality and security of data, interoperability and integration with existing legacy systems,” he explains. “There is also costly, lengthy and complex due diligence and procurement processes, alongside a lack of in-depth understanding of RegTech solutions. FIs need to step up their effort to overcome these challenges.”

The reality, of course, is that change takes time and requires trust. “We see many providers pushing onto the market with fast solutions, but they overestimate how quickly FIs can adapt,” contends Kai Leisering, managing director of corporate compliance at the EQS Group. “New solutions have to be embedded organisationally and at the same time there are framework conditions, such as data protection and data security, that slow down fast implementations.”

RegTech providers

Despite the challenges involved in RegTech implementation, it is clear that an ever-increasing number of FIs are turning to RegTech product and service providers to help overcome the compliance and regulatory hurdles they face.

“Overall, we have noticed high levels of FIs’ satisfaction with RegTech solutions with over 70 percent of FIs reporting being satisfied with realised benefits of their adopted RegTech solutions,” says Mr Tamulenas. “FIs already using RegTech solutions benefit from enhanced risk management capabilities, better monitoring and sampling capabilities, and reduced human error.”

Testifying to the burgeoning interest in RegTech solutions is recent research commissioned by the UK’s Financial Conduct Authority (FCA), featuring the views of senior decision makers in compliance or innovation roles at UK-based FIs with 200-plus employees. It revealed that all firms are either currently implementing RegTech or are planning to do so over the next two years.

“RegTech providers have made out-of-the-box models a reality, with proven solutions that introduce efficiencies and scalability to regulatory compliance monitoring,” says Mr Norburn. This allows for much quicker implementation and brings a more immediate return on investment. At the same time, firms are reaping the benefits of deeper insight into customer interactions and more confidence in process adherence and compliance.”

Strategy and deployment

Although viewed by many across the financial services landscape as the key to mastering their regulatory burden, achieving compliance via RegTech requires recourse to effective and sustainable adherence strategies.

“Streamlining governance processes is necessary for using RegTech,” explains Mr Tamulenas. “We have observed that in order to ensure successful adoption of RegTech solutions, FIs need to undertake thorough due diligence and risks assessment, assess their technological readiness, establish a senior-level RegTech sponsor and determine the most appropriate deployment model.”

Moreover, it is important for the chosen RegTech solution to be up‐to‐date with the latest regulatory requirements. “Plan an exit strategy in case a RegTech solution cannot be used or is no longer needed,” adds Mr Tamulenas. “Last, but not least, ensure that the RegTech solutions are properly embedded into established systems and processes, with all associated risks managed. FIs need to consider all these aspects in order to excel.”

In the experience of Ms Leisering, it is beneficial for FIs to start with lean and manageable projects instead of going for a sweeping approach. “In this way, project risks can be better managed and, at the same time, it contributes to the acceptance of new processes, which are quickly visible,” she suggests. “Lean and simple processes are much easier to sell than sprawling sets of rules.”

Pandemic pressures

For many FIs, the pandemic has brought great pressure to change, accelerating and intensifying the already pressing issue of digitalisation and how best to implement it.

“The deployment of new technology-led solutions accelerated by the pandemic enabled FIs to ensure business continuity and adapt to remote working,” asserts Mr Norburn. “Innovative technology helps firms to manage conduct risk and compliance along with a healthy and inclusive company culture – one that mitigates the potential risks arising from business models and strategies, rather than exacerbating them.

“The next challenge is to carefully assess their new technology portfolio and ensure true alignment with long-term business strategy,” he continues. “Ultimately, FIs that succeed in the future are likely to be those for which compliance is not just a tick-box exercise, but a by-product of strong and purposeful culture.”

Increasingly digital

With the value of the RegTech industry forecast to grow to $22.2bn by 2027, its position as a credible regulatory compliance option seems assured, its status steadily maturing and evolving.

“Technologies such as cloud computing or ML will continue to transform the way FIs comply with their regulatory requirements and will make certain processes more effective and efficient,” believes Mr Tamulenas “We also expect to see a further increase in use of internal and external RegTech solutions. Despite the ongoing pressure to reduce overall costs, FIs’ spending forecasts on RegTech technology remain optimistic.

“However, RegTech solutions, if not properly implemented, may give rise to compliance, concentration, business continuity, ICT and security, reputational, internal governance, conduct, and consumer protection or technology risks,” he continues. “We expect FIs to closely monitor and be prepared to manage any associated risks.”

For Mr Norburn, the RegTech industry is here to stay and expected to grow. “Technological advances in AI and ML have driven the industry’s development of powerful, intelligent tools to manage risk and compliance,” he observes. “In a broad and varied marketplace, FIs can now choose RegTech on their own terms – taking into consideration the accuracy, suitability and scalability of solutions – rather than being at the mercy of tech giants.

“Given the fundamental shift in customer behaviour and attitudes over the past couple of years, this trend is set to continue,” he concludes. “Forward-looking firms that invest in AI- and ML-driven solutions ahead of others are already reaping the commercial benefits and will continue to do so with ever-evolving intelligent technologies.”

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Fraser Tennant