Over $36 Billion in regulatory fines were levied against financial institutions since the 2008 crisis1. Global regulatory complexity continues to increase (AML 5 & 6, Basel IV, GDPR, PSD2) and cyber & information security breaches can destroy a firm’s reputation. Costs have skyrocketed with an average of 10-15% of financial services workforces now engaged in compliance processes2. And then there’s COVID…
In response to these threats, most firms have implemented a patchwork of systems, initiatives, and manual processes that are, at best, band-aids trying to keep up with the latest operational risk and regulatory challenges. These patchworked solutions are no longer adequate due to being heavily manual, not timely, lacking integration between components, and increasingly costly to maintain and update as regulations continue to change. This all leads to “risk fatigue” where employees increasingly treat regulatory and risk activities as “check box” exercises and accountable managers are left signing off on data that they don’t fully trust.
Enter Regulatory Technology, or RegTech, which has taken off as a major industry segment since the 2008 financial crisis, driven by the massive increase in regulatory and risk management complexity and enabled by technology advancements (e.g., Cloud, Artificial Intelligence (AI), and lower entry barriers for Software as a Solution (SaaS)). In simple terms, RegTech applies to any company that provides technical solutions in the areas of regulation, risk management or cybersecurity. RegTech now consists of hundreds of companies covering various portions of this regulatory and risk landscape (e.g., Regulatory Reporting, Risk Management, Identity Management & Control, Compliance, AML & Transaction Monitoring).
Industry trends
The RegTech market currently has over 1,300 companies and is growing at a fast pace (USD 6.3B in 2020 increasing to USD 16B by 2025)3. RegTech firms vary in size from small startups to IBM, which has integrated its Watson AI platform into their RegTech solutions and will continue to add partners to increase enterprise-wide RegTech functionality. New RegTech firms and consolidation of existing firms will continue to occur as the RegTech market matures over the next 5 years.
Risk and Compliance solutions are currently the largest subcategories within RegTech. The following link provides a good sense of the current RegTech landscape and the subcategories which are covered: https://fintech.global/regtech100/.
The pace of new regulations will continue, especially in the areas of information security and crypto currencies where legislation and regulation lags behind technical innovations. Jurisdictions are coming out with their own variants of data protection legislation which will continue to get more stringent in the upcoming years. It’s worth noting that while the EU has comprehensive General Data Protection Regulation (GDPR), the US is relying on limited sectoral laws like California’s Consumer Privacy Act (CCPA). In the crypto space, governments are still debating whether crypto currencies should be regulated as money or securities.
Regulators benefit from RegTech innovation and adoption as it’s helping to standardize and improve submissions. Regulators like the FCA are actively helping RegTech get their solutions and revisions to market faster by providing sandboxes which provide access to high quality data assets to test against. This trend of regulatory support will increase and further fuel RegTech innovation and adoption.
In the future, governments and regulators will evolve to the point where they are codifying and maintaining their own requirements (rather than relying on individual firms to interpret). But in the interim, this has created an opportunity for RegTech firms and the firms that deploy RegTech.
RegTech will increasingly be adopted by, and benefit Financial Services firms through:
- Providing enterprise wide toolsets, frameworks, and real-time management views and help move away from inefficient patchwork solutions
- Translating and maintaining onerous regulations into a digital set of rules which can be consistently applied to your firm’s data and subsequently used to provide evidence to the regulators
- Leveraging AI to model regulatory costs and barriers to help drive investment decisions and strategy to differentiate your product offerings over competitors
Integrated regulatory and risk strategies (with roadmaps) will increasingly be differentiators. Smart firms will “self-fund” these new strategies from their already sizable regulatory and risk budgets by aggressively automating current processes to free up capacity. Successful strategies will provide:
- An integration of RegTech and existing solutions
- Evangelistic drive towards automation
- Realigned governance and data strategies and taxonomies that support risk & regulation
- Integrated modelling, forecasting, and enterprise-wide reporting that improves revenue decision making by highlighting regulatory issues and risks BEFORE deals are done
Conclusions
At Fintova, we are seeing that the best firms have clear business and technology strategies which incorporate RegTech to minimize costs, reduce risk, and improve the firm’s bottom line. The Financial Services industry will continue to face unexpected challenges and new regulatory hurdles. RegTech solutions are essential to more effectively manage risk, reduce skyrocketing costs, and provide the agility needed to adapt to future requirements.
If RegTech isn’t part of your firm’s strategy, you may be losing ground to your competition and need to take action now.
- Jaclyn Jaeger, “Study: Post-financial crisis fines against financial institutions hit $36B,” Compliance Week, Feb 11, 2020. https://www.complianceweek.com/surveys-and-benchmarking/study-post-financial-crisis-fines-against-financial-institutions-hit-36b/28429.article
- “RegTech’s hidden opportunity: Healthcare RegTech & Regulatory Compliance,” Planet Compliance, May 7, 2020, https://www.planetcompliance.com/2020/05/07/regtechs-hidden-opportunity-healthcare-regtech-regulatory-compliance/
- “RegTech Market worth $16.0 billion by 2025,” Markets and Markets, accessed on Sep 22, 2020, https://www.marketsandmarkets.com/PressReleases/regtech.asp
