Reasons Behind the Rise of RegTech Companies

4 mins

What is RegTech?

Regulatory technology, in short RegTech, is a modern industry using information technology to enhance regulatory processes. RegTech applies modern technologies including artificial intelligence, Big Data and machine learning to overcome regulatory challenges primarily in financial services. The UK Financial Conduit Authority defines RegTech as “a sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities”. With its main application in the financial sector, RegTech is currently expanding into other regulated business as well. RegTech companies mainly focus on regulatory monitoring, reporting and compliance in the financial sector.

RegTech is a fast-growing industry across the globe. According to a research report by Facts & Factors, the global RegTech market is expected to grow at a CAGR of 21.27% to around US$33.1 Billion by 2026 from about US$5.31 billion in 2019. Global investors pumped in a large sum of money into the RegTech sector recently. Global RegTech investment surged to US$8.5 billion in 2019, compared to US$1.1 billion in 2018, representing a CAGR of 66.7%, according to Fintech Global.

What do RegTech Companies Do?

Today, a large financial institution handles a large volume of data from multiple sources for compliance purposes. It may find it too complex, costly and time-consuming to process the data and analyse it for making better compliance decisions. RegTech companies can help analyse the data systematically and predict potential risk areas that their customers should focus on. By using analytics tools created by RegTech companies, financial institutions can successfully comply with regulations and save time and money.

The objective of RegTech is to ensure transparency and consistency, standardize regulatory processes, and deliver sound interpretations of regulations, thereby providing higher levels of quality at a lower cost.  RegTech companies often use the cloud through software-as-a-service.

Regtech companies are increasingly collaborating with financial institutions and regulatory bodies, who have extended their support to the industry by encouraging financial institutions to test and adopt modern technologies. At present, RegTech companies operate in various areas of the financial and regulatory space. Their solutions help automated a number of processes, including employee surveillance, compliance data management, fraud prevention and anti-money laundering. Some of the areas that RegTech solutions are addressing are:

  • Regulatory monitoring
  • Identity verification
  • Management information tools
  • Transaction reporting tools
  • Regulatory reporting tools
  • Activity monitoring tools
  • Case management tools
  • Transaction monitoring
  • Sanction screening
  • Payment screening
  • Compliance registers

The Need for RegTech Solutions

Being one of the most strictly scrutinized companies across the globe, financial institutions have a long list of regulations to comply with. Further, they face an increased frequency of regulatory changes after the 2008 global financial crisis. Current legacy compliance solutions used by financial institutions are failing to meet the stringent requirements of regulators.

In order to increase the efficiency of their compliance processes, complete their increasingly complex regulatory obligations on time and mitigate compliance risk better, financial institutions are now increasingly turning to RegTech companies and their new-age solutions. RegTech companies offer a seamless way for financial institutions to meet their regulatory requirements, without replacing their existing processes entirely. By partnering with RegTech companies, with deep domain expertise, financial institutions can better manage risk related to regulatory compliance.

Factors contributing to the emergence of RegTech companies

There are many challenges faced by financial institutions in connection with regulatory compliance that make them depend on modern technology. The major factors contributing to the emergence of RegTech companies are:

  • Very frequent additions or modifications of regulations by countries

Regulators across the globe are coming up with new regulations or modifying existing regulations primarily in connection with changing risk landscape of financial institutions. Existing solutions are unable to keep up with the additions and modifications, and therefore financial institutions are looking for solutions that can incorporate regulatory changes with ease and in a cost-effective manner.

  • High labour costs related to compliance

Labour costs are going up for financial institutions across the globe in line with increasing requirements by regulators. Onboarding and training compliance staff have become an expensive affair and has started affecting the bottom lines. Modern RegTech solutions can automate a large number of processes so that financial institutions can save a lot in terms of manpower.

  • High production and deployment costs of regulatory compliance solutions

Legacy rules-based solutions are costly to develop, implement and maintain in the long run. Many solutions become obsolete in a matter of a few years due to fundamental changes in regulations, leading to replacement costs as well. Modern RegTech solutions are available as packaged models that require minor tweaks to suit the needs of the customer. With API and SaaS models, they are cost-effective to implement and maintain.

  • Non-standardized methods and insufficient data integration and analytics options

Existing solutions are mostly tailor-made to suit particular needs and there may be separate solutions to address various compliance needs. Modern RegTech solutions, powered by AI and machine learning, offer a lot of possibilities with their data integration and advanced analytics capabilities.

  • Higher penalties for non-compliance

Each year, global regulators are handing out penalties totalling billions of dollars and the amount keeps on increasing. Higher penalties not only impact the profitability but also leads to reputational risk.

RegTech is poised to be the future of regulatory compliance as they facilitate better compliance management and risk mitigation. At present, there are several hundreds of RegTech companies worldwide, providing new-age solutions and services to support businesses with their pressing compliance needs related to regulations such as PSD2, MiFID II and 6MLD. An award-winning RegTech company, Tookitaki offers various compliance solutions including machine learning-powered AML software to mitigate AML risk