Regtech Essentials

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Regtech refers to technology that helps solve regulatory challenges by providing governance, risk management, compliance and regulatory reporting solutions. It also includes PolicyTech. By organizing and explaining large flows of data, i.e., multiple regulations, regtech ensures better quality and more cost effective compliance. Agile regulatory technology helps companies of all sizes to better understand and manage their risks by adding value to data and reporting. Regtech, like fintech, has a fluid definition that varies across industries where it is employed.

Regtech has undergone a period of extensive growth in 2017. Compliance and governance technology is important in fintech due to the ever growing amount of regulation in the finance industry. Since the financial crisis in Europe and America in 2008, the banking sector has been inundated with increasing amounts of regulation making compliance complicated and costly. Head of KPMG’s governance practice and regtech specialist AnneMarie Smit says that ‘every new regulatory package increases the complexity and also the need for clarity.’ Compliance teams in banks have ballooned due to increasing expectations: CitiBank has now 30,000 staff dedicated to compliance.

Increasing compliance staff is impossible across the financial industry: for startup fintech companies, SMEs or larger incumbents. Small and large companies do not have the means to hire the required staff, nor are there enough compliance professionals to meet growing regulatory needs. Regtech helps compliance to become more cost effective and realistic. As compliance is not in the competitive space and adds no value for customers, costs need to be kept low. Importantly, regtech can prevent mistakes easily made by human error that are increasingly costly as infringement fines continue to grow.

Twelve months ago, the RegTech Futures summit in Amsterdam discussed the important potential of compliance innovation, but showed there was still a long way to go. Banking Technology reported the event was filled with ‘hipsters, hackers and hustlers,’ alluding to the experimental nature of the burgeoning industry. Getting contracts signed to initiate change and fears of job losses were reported as the main barriers to regtech adoption.

Today that landscape has completely changed.

Regtech is incredibly valuable at this moment in time in Europe because three new regulations will come into effect in 2018: MiFIDII, PSD2 and GDPR. In addition, there is a continuing strong need for regtech regarding KYC and AML due diligence processes. Increasing levels of regulation and regulatory expectations globally after the 2008 financial crisis have prompted a period of accelerated development of regtech. Companies of all sizes are struggling to keep up with changing regulations and increased expectations. Being a technological solution, regtech can provide transparency to the regulatory process, allowing a more hands off approach by government. Breaches of the new regulations will be met with harsh penalties.

Regtech is a friend of regulators as well. It encourages transparency and real time reporting, making the regulator’s job quicker and easier. Regulators in the European Union has made the 2018 regulations largely technology neutral. However, this is not the case regarding KYC and AML requirements. Technology neutrality will be important in the future. This recognises the difficulty for law to keep up with technological advances. Being technology neutral ensures ongoing relevance and encourages the use of regtech in compliance and reporting.

What is the future of regtech? Presently there is great demand for regtech in Europe. The necessary compliance changes for the PSD2 and GDPR will take time to implement, suggesting that 2018 will again be a year of serious regtech developments. Other future opportunities and challenges for regtech include Brexit, growing demand in Asia and technological advancements in AI and data analytics.

With Brexit, the regulatory regime in Europe will change once again. Firms will be required to comply concurrently with multiple regulatory schemes. This change will provide the opportunity for companies who provide successful and widely adopted regtech solutions to become global regtech leaders in multi-jurisdictional real time compliance. The British Financial Conduct Authority (FCA) has established a healthy fintech and regulatory ecosystem in London, making it a regtech hub. Having a different regulatory regime to the EU post-Brexit will require another continental city to take up the title as Europe’s regtech hub. Possibilities abound.

Further, regtech has huge potential for development in Asia. The Asian fintech hubs have inconsistent regulatory regimes and few large scale regtech firms have entered this market. The largest regtech developers are based mainly in the UK and US. Europe, also, has experienced high levels of regtech adoption this year. In contrast, regtech is still in its early stages in Asia. There are only a handful of startups providing mature products for financial institutions in Asia, says PwC FinTech Lead for China/HK, Henri Arslanian. As such, the opportunity for Western-based regtech to enter the Asian market is strong, especially in fintech hubs Singapore and Hong Kong.

Technical developments in computing and artificial intelligence will also provide regtech with development opportunities. Data liquidity and mobility caused by the PSD2 and global adoption of open banking will be a catalyst for change as the capabilities of regtech will be massively increased.

Overall, regtech has a promising future. It is a win-win solution for everyone: banks, fintech companies, law and consulting firms and regulators. What’s more, regtech has many opportunities to grow in the future. At HollandFintech, we suggest you watch this space.

This article launches Holland Fintech’s RegTech Focus. Over the next two weeks, we will present regtech news and research to boost knowledge in this field.

By Grace Appleford, Research Analyst for Holland Fintech.

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