Things That RegTech Can Solve Today

Terms like “Legal Tech” and “FinTech” have become quite common in the business landscape over the last few years. Companies like Clio (Legal Tech) and Revolut (FinTech) have firmly established themselves as trusted providers for many businesses. However, there’s one more “tech” term that’s gaining prevalence as a solutions provider, and that is RegTech.

What is RegTech?

Investopedia defines RegTech as the management of regulatory processes within the financial industry through technology. It’s safe to say that RegTech emerged from the traditional economic principle – “when there’s demand, there’s supply”. And there is demand – in this case, the demand is to comply. This demand has grown exponentially since the Global Financial Crisis of 2008, thanks to the introduction of the Dodd-Frank Act and other regulatory reforms related to Anti-Money Laundering (AML) and due diligence (KYC) requirements, amongst others. The cost and workforce required to comply with these were staggering, but the non-compliance cost even more in fines, according to the paper by the CFA Institute Research Foundation. Which is where RegTech came in, introducing digitization of regulatory compliance and reporting processes.

What are the applications?

Traditionally, RegTech was targeted towards the finance industry. Solutions like KYC, AML, due diligence, anti-fraud, and others are used increasingly by financial institutions around the world.

However, RegTech’s potential is far more significant than a single industry. The position of a compliance officer, especially in multi-national companies, is an increasingly demanding one. And the players of industries that are regulated more heavily than others have entire compliance teams, even. They have the increasingly difficult task of ensuring company policies are compliant with all the regulations (both of HQ country and laws of other jurisdictions where their employer is active) and that the company is safeguarded against regulatory risks.

Sanctions compliance is a massive example of this. EU laws restricting European banks from dealing with certain parties in countries like Russia and Iran are relatively new, and their US counterparts (CAATSA) are even more so. Given how hefty the fines and other consequences are for breaching sanctions laws, it’s no surprise companies want to make sure they stay compliant. The BNP Paribas case where the bank had to pay $9bn in fines for sanctions breach is an example of why this is significant. And good RegTech solutions combat the issue of staying on top of compliance regulations that continuously shift, like the geopolitical landscape that’s causing their emergence.

What puts “tech” in RegTech?

It’s expected that most RegTech involves data analytics and storage in some way. Cloud computing is very common – with the enormous volumes of data circulating across the network of a multi-national bank. For instance, cloud computing helps save on costs on the storage of the data. Machine learning (ML) is pivotal for data analysis and spotting anomalies and suspicious things – same as Big Data. For internal compliance, biometrics identification technology can help enhance the security of internal processes.

Of course, this list is far from exhaustive. And the new technologies are continuously tested, using the “regulatory sandboxes” approach, led by the FCA in the UK and tried in other jurisdictions. Plus, we must keep in mind the other side of the coin – the regulators themselves. Currently, RegTech is primarily aimed towards helping the private sector comply with the regulations. Hopefully, in the future, we’ll have RegTech solutions that support the regulators to stay agile and reduce the time and costs of investigations.