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29 Nov

The RegTech boom: tracking its upward trajectory

A brief history

After the crash of 2008 regulators stepped in to prevent it from happening again; protecting the economy and restoring the public’s faith in financial services. A wave of regulation overseen by the Bank of England and the Financial Conduct Authority (FCA) ensued, creating a new era for the compliance function.

This coincided with the technological advances working their way into the fabric of financial firms such as online banking and investing and payment services. This improved customer experience but brought with it heightened vulnerability to financial crime and cybercrime.

This new technological threat and post-crisis regulation created a demand for a solution to allow firms to protect themselves and manage the volume and scrutiny of regulatory requirements. This paved the way for a new ‘tech’ – RegTech (Regulatory Technology) and what the Hardvard Kennedy School described as a shift from an ‘analog-era to digital and computational models’.

Digitisation and the Internet of Things (IoT) isn’t going away and RegTech allows firms to operate as securely as they can in this brave new world. It gives them a means to protect their business from fraud and huge penalty fines while safeguarding their customers, reputations and integrity. It is here to stay.

RegTech today

RegTech solutions can compile huge volumes of data from multiple sources and process and interpret it to create reliable and standardised reports for the regulators. This process is cheaper, easier, faster and more precise than human capabilities or legacy platforms.

Charles Delingpole, an early entrant into the RegTech market with an automated screening solution said, “…AI now enables us to look at all of the data, rather than just some of the data, and it often reaches different conclusions”. It doesn’t threaten the future existence of the human workforce, it just allows them to focus on more strategic objectives.

Artificial intelligence (AI), biometrics, big data, machine learning, cloud computing, blockchain and distributed ledgers are all RegTech products making an impact in the industry. Credit scoring and lending decision making, identity verification and pre and post trade monitoring all now have hugely more extensive and timely controls.

This has armed firms with new tools to automate and streamline complex and otherwise challenging compliance tasks required for recent revisions of the Payment Services Directive (PSD2), Markets in Financial Instruments Directive (MiFID II), Anti-Money Laundering (AML) and Know Your Customer (KYC).

The regulators themselves are taking advantage of RegTech for their own work and are actively encouraging innovation in the field.

The future

As solutions become tried and tested and the benefits become clearer, more and more firms are drawn to RegTech. Regulation keeps on coming (and changing) and so it’s opportunity to evolve with new offerings and appeal to a wider and more engaged audience develops with it.

The new open banking regime will allow developers to access large volumes of banking data through secure APIs and provide fertile ground to develop the next phase of RegTech. Providers can also evolve and grow by partnering with other RegTech firms and indeed the financial institutions themselves. They will be supported by their regulatory advocates and consultancies’ recommendation of their solutions.

This phase of wider adoption leads to predictions of mainstream use across financial institutions and global regulators by 2020.

Challenges

RegTech can offer smaller businesses, who often feel the pressure of high compliance requirements, a longer-term cost saving and efficient means of meeting the regulatory demands. However, with high entry costs and capability RegTech firms need to find a way to scale their solutions to make them attainable for these businesses.

Larger businesses have bigger budgets, but they face problems with legacy systems. Migration processes, managing down time, multiple data sources and data conversion needs to be factored in. Forward thinking will be needed to push through the pain points for an easier, safer and more cost-effective future.

The regulatory landscape is constantly changing, and so agility is key for RegTech providers. It is also critical that they are able to get assurances from the regulators that their solution is acceptable in order to be able to pass on confidence to their consumers that their investment is worthwhile.

A key barrier for firms is getting the right balance of compliance knowledge and technological expertise. We as head-hunters actively seek talented and experienced people with this joint skill set to allow firms to address their skills gaps and move forward with their integration.

To conclude

RegTech has a key role to play in satisfying the needs of regulators, businesses and their consumers. The most successful providers will be able to react quickly to change, providing viable answers to questions posed by financial institutions, large and small.

  • Author

    Denis Spearman

    Partner, Head of Compliance Practice

    View profile