Regulatory environment across Europe is characterized by high levels of scrutiny and complexity, therefore successfully complying with the multitude of regulations can be a complex, time-consuming and expensive task for companies. This is particularly relevant in the aftermath of financial crisis which resulted in a significant increase of information requirements by regulatory bodies. A wide variety of new regulations covering various aspects of financial sector, in particular, have been introduced and financial services have become highly dependent upon timely and reliable access to vast amounts of data. This unprecedented increase in regulatory challenges along with the growing amounts of data have led companies and technology providers to focus on new technologies in order to meet regulatory challenges.
In recent times several RegTech solutions have been developed in order to yield efficiencies and disrupt the conventional regulatory compliance driving down the costs at the same time. Also regulatory bodies have shown their interest for the Regtech sector. For instance the UK Financial Conduct Authority (FCA) in November 2015 issued a call for input entitled “Supporting the development and adoption of RegTech”. The Feedback Statement was released by FCA at the end of July 2016 and it constitutes a first important step in investigating the sector. Having considered the pressing need for further talk on the prospects of Regtech solutions, and based on the findings of the research conducted and public discussions undertaken by FCA, we decided to share here an overview on the RegTech sector.
What is RegTech?
RegTech is a sub-set of what is generically known as FinTech and refers to a merger of technology and regulation. FCA was the first governmental body to establish and promote the term RegTech, defining it as: “a sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities“. In other words, RegTech solutions are aimed at making easier for companies across all sectors to comply with the regulatory requirements through technology. On one side, RegTech solutions will significantly decrease the regulatory burden for companies by automating processes, and reduce operational risks associated with meeting compliance and reporting obligations. For instance, RegTech can contribute to facilitating compliance for audit, finance, risk management areas. RegTech will enable banks and financial institutions to report far more accurate information to regulatory bodies. On the other, regulators will also benefit from these software innovations since the increased level of information responsiveness, flexibility, accuracy, granularity and availability, should make it easier for them to monitor systemic risk. Thus, regulators might make a good exploitation of the information reported by regulated entities.
What are the common features of RegTech solutions?
RegTech solutions stand out from the traditional solutions because they are usually cloud-based. Furthermore, they tend to be speedier, cheaper and more secure. Cloud based solutions allow data to be remotely maintained, managed and backed up, having it secure at the same time. Traditional solutions are robust and inflexible while cloud-based solutions offer an advantage of being responsive and flexible. The cloud also enables RegTech to significantly cut the costs both for providers and clients. Moreover enhanced security is also one of the key traits of modern cloud-based solutions meaning that data is encrypted during transmission and while at rest. Finally the implementation and integration of RegTech solutions are relatively easy, they require short timeframes to get solution up and running.
RegTech in Practice
RegTech solutions addresses regulatory requirements through software innovations, such as machine learning, artificial intelligence, big data, predictive analytics or blockchain. Different technologies may be leveraged depending on which compliance issues they are designed to address.
As a way of illustration, a non-exhausted list of RegTech applications in practice is presented below:
- risk data aggregation and management;
- identifying and interpreting regulations, including upcoming changes;
- supervising operations to ensure they comply with current regulations;
- monitoring payments transactions for fraud prevention;
- Anti-money laundering (AML) and Anti-terrorist financing (ATF) solutions;
- identity verification as required by Know Your Customer (KYC) regulations;
- updating compliance manuals;
- markets trade surveillance;
- modeling and forecasting risk for bank stress-testing;
- communications surveillance;
- measuring and analyzing people’s physical and behavioural characteristics.
While the FinTech market is exploding, RegTech still represents a niche market and it is at the early development stage where no dominant solution yet emerged. The growth of the market is promising and RegTech solutions are often described as revolutionizing the compliance process for financial services.
Although the term “RegTech” only appeared about one year ago, the number of RegTech startups present in the market amounts to about 100, all of them having popped up in the past five years. Most of the startups are based in UK, Ireland and US. Luxembourg, the Netherlands and Switzerland have also demonstrated a great interest in and focus on attracting more RegTech companies and relevant investments. The peculiarity of this market is that strong collaboration and knowledge sharing between regulators, technology and software developers, financial institutions, is required. It is also worth mentioning that some challenges for the development of RegTech solutions exist, especially in connection with data protection compliance. Lawyers in this respect can play a prominent role in advising Regtech companies on how to design solutions compliant with the regulations in force.