The financial sector has long been replete with regulations to create and maintain its conducive environment for all stakeholders. For decades since the 2008 global financial crisis, waves of new rules and regulations hit the financial industry at a staggering rate, continually adding on to the already extensive list of existing ones in force.
Struggling to keep up with the myriad of ever-changing regulation, financial institutions (FIs) are facing enormous stress from the high complexity of regulatory compliance, and stringent timelines set by regulators resulting in many FIs slapped with hefty fines and aggressive consent orders. According to Bloomberg reports, global regulators have levied over $321 billion in penalties for regulatory violations since 2008.
In an attempt to ease the ever-increasing burden of keeping up with the rapid changes in regulations and preparing for the further complexity of regulatory, FIs are starting to seek alternative long-term solutions in the financial technology (FinTech) industry, thus giving rise to regulatory technology (RegTech). The increasing attention towards this technological creation as a solution to end-to-end governance and regulatory compliance has significantly impacted the financial regulatory landscape, affecting the way different stakeholders operate within the financial industry.
What is RegTech?
RegTech is the technology that addresses regulatory challenges and facilitates the delivery of compliance requirements. It aims to standardise regulatory processes, create unambiguous interpretations of the regulations and automate the compliance process.
RegTech is also a seamless alternative for regulatory problems without the need to overhaul existing models entirely, which is made possible due to its position as one of the established creations within the FinTech ecosystem. With its solid foundation in the robust FinTech industry, RegTech was created under the support of major FinTech technologies, namely artificial intelligence (AI), big data, blockchain, machine learning, virtualisation, API, data mining and analytics and cloud computing.
With these technological supports, RegTech can provide a variety of solutions and services for both regulators and FIs respectively. For regulators, RegTech systems will help to strengthen the regulatory and supervisory capacity by effectively using the unified data to monitor the rapid developments in the sector. As for FIs, RegTech will assist in internal control, accountability for risk data, compliance assessment, analysis and effective policy as well as procedure managements in regards to the different requirements by various regulatory bodies.
It is no surprise that RegTech is slowly altering the operation and systems function, creating a digitised outlook for the financial regulatory industry by facilitating compliance management while minimising regulatory risks. RegTech is poised to satisfy both the on-demand needs of FIs and regulators by providing robust automated compliance solution to both ends.
RegTech: An Emerging Trend
For years, FIs has faced increased scrutiny from the regulators as they expand their traditional approach of compliance and risk to address the new circumstances. While it helps to identify the changes, this approach has also inevitably increased the cost of regulatory compliance, making what was once a negligible expense expanding becoming a material component of firms’ annual spending.
Additionally, the new and stricter regulations together with the economic pressure triggered by the recent coronavirus pandemic have also intensified the existing financial crisis faced by FIs. This has thus forced the financial industry to re-evaluate its operating model and seek alternative solutions to replace costly manpower that unfortunately accompanied by human errors.
The mismatch in saving cost and traditional problem-solving approach used by the FIs, paired with the rising of information technology, has therefore created an ideal breeding ground for RegTech. While the current focus of the FinTech industry is still on the customer-facing areas, experts and FinTech companies have also started devoting attention to optimising individual technological compartments and elements. This has resulted in the perfecting of the technical functions that RegTech engages in, allowing for scalability that reduces costs and saves time. Thus, making it an emerging trend within the financial regulatory industry.
Opportunities and Obstacles
Besides cost reduction, RegTech’s increasing popularity is also due to its ability to provide strategic financial regulatory solutions for FIs. However, there are still obstacles needed to overcome for RegTech to be widely accepted, and these opportunities and obstacles are as follows.
Firstly, the biggest advantage that RegTech has over other solutions is its robotic process automation, where regulatory compliance will no longer be a hassle. With the help of AI and machine learning, algorithms used in RegTech can be programmed to simplify the compliance procedures by searching for new regulations automatically and efficiently while ensuring transparency and consistency in regulatory reporting.
The introduction of such functions has helped keep FIs in checks with regulation deadlines and possible further regulatory action. It has also reduced the workload and resources needed and as a result, lesser reliance on manpower and minimising the risk of human error and deviation.
Besides compliance automation, risk management is also another advantage. With the application of big data mining and advanced analytics, RegTech can determine the root cause of a regulatory breach and promptly identify potential risk areas, compliance issues, fraud as well as opportunities that will enhance business growth.
Such a predictive analytic approach has enabled RegTech to engage in a variety of analytic activities, such as scenario analysis, regulatory ecosystem analysis, and real-time user engagement analysis. This has thus resulted in the changing dynamics of compliance efforts, while sustainably increasing the quality of risk management and compliance.
Lastly, RegTech has the advantages of allowing FIs to have better financial insights through data management where cluttered and intertwined data set can be de-coupled and organised through extract, transfer and load (ETL) technologies. Enabled by cloud computing technology, RegTech solutions will have the ability to address the enormous volume of both structured and unstructured data, making regulatory data filings more efficient, transparent, and useful for stakeholders who generates, collects, and consumes them.
Despite its potential, the adoption of RegTech by FIs is expected to face many hurdles. One of the biggest obstacles is the concerns regarding the use of technology. Just as any other FinTech companies, RegTech providers will have to deal with the constant scrutiny on cybersecurity, digital ethics and data protection that could potentially obstruct the alignment of the regulation. Or worse, result in an even stricter and intrusive regulatory framework that will eventually affect the operation of FIs as regulators and supervisors are not convince of the technology solutions provided by RegTech.
The lack of sufficient skilled workforce is also another difficulty the RegTech industry is currently facing. Although FIs employs a large number of technology professionals and compliance officers, only a small amount of individuals is well versed in RegTech solutions. This suggests that there is still a big shortage of talents in AI, machine learning and blockchain, which are essential in the development of the RegTech solutions. Such a talent shortage will thus hinder the development of RegTech solutions, making it harder to convince senior executives and regulators of its potential in regulatory compliance which is an irony given that RegTech is an emerging industry where its investment is believed to generate up to 600% ROIs.
As such, more work is needed to be done by RegTech providers in providing digital solutions to achieve higher efficiency and resources sharing while at the same time, attracting more talents to learn and join this industry.
A Hybrid Consulting Approach
Undeniably, RegTech is redefining the future of financial services, changing the way financial institutions addresses regulatory compliance requirements. Yet, financial experts believe that to facilitate the regulatory compliance gap effectively, cooperation across sectors is necessary, particularly the regulators, the financial institutions, the RegTech firms, as well as the consultancy agencies are required in solving the regulatory problems in the long term.
According to a Thomson Reuters 2017 study, most financial institutions are geared towards a hybrid consulting approach to RegTech adoption, collaborating with third parties to obtain short to medium terms solutions while outsourcing specific processes of checking new regulation to existing RegTech providers. Although such an approach is believed to be more beneficial, financial experts still hold on to the belief that upskilling internal resources while leveraging the existing experience and knowledge of third party consulting agencies will produce the most valuable results.
To understand more on the global financial regulatory landscape and regulatory compliance requirements, it is best to engage established business consultancy experts like Desfran. Spearheaded by one of the world’s leading management teams, our team of seasoned experts stationed in more than five cities across the globe, dedicated to helping you with their years of experience in providing regulatory compliance solutions across different jurisdiction.
As a one-stop solutions provider, Desfran not only provides new market entry consultancy services, new market requirements like business incorporation and registration, bank account opening, marketing services and regulatory compliance can all be fulfilled through Desfran’s bespoke solutions. We continuously stay on top of trends and movements in the financial industry to help your business growth by identifying, maximising your business potential while providing comprehensive customised solutions.
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How the financial industry is using RegTech to its advantage, Juliusbaer.com
RegTech: A new disruption in the financial services space, Pwc.in
Financial RegTech: Opportunities and Obstacles [PDF], Captechconsulting.com
RegTech on the rise: Transforming compliance into a competitive advantage, Oliverwyman.com