Regulatory technology, in short RegTech, is a new industry that uses modern information technology to enhance regulatory processes. RegTech applies modern technologies including artificial intelligence 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.
Today, a large financial institution handles large volume of data from multiple sources for compliance purposes. It may find it too complex, costly and time-consuming to the process the data and analyse it for making better compliance decisions. A regTech firm can help analyse the data systematically and predict potential risk areas that their customers should focus on. By using analytics tools created by RegTechs, 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.
History of RegTech
The pitfalls in the financial sector that led the financial crisis in 2008 and the disruptions happened in the financial section with the emergence of a number of technological advances prompted regulators to update their norms to control their subjects. As a result, financial institutions became burdened with many regulatory requirements, which are both costly and cumbersome to implement, and non-compliance led punitive measures including hefty fines. In order to help financial institutions manage their regulatory compliance requirements efficiently and lower the ever-increasing cost of compliance, an increased number of companies came up with services and solutions. These tech companies promise to make the process of managing regulatory compliance efficient and cost-effective.
Current State of RegTech
Increased digitalization in the banking and financial services sector has given rise to a number of challenges. There has been an increase in crimes such as data breaches, cyber hacks, risk of money laundering, and fraud. By using technologies such as Big Data and machine learning, RegTech companies have started proving that they can do a better job than legacy systems in the detection of illicit activities. Many RegTech companies have moved out of the laboratory to the real world and started operationalizing their solutions in production environments.
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. The use of cloud computing has enabled many RegTech companies to reduce implementation costs while helping share data quickly and securely.
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. Given below are a broad set of applications that RegTech companies are addressing.
- Legislation/regulation gap analysis tools
- Regulatory monitoring
- Policy management
- Compliance universe tools
- Health check tools
- Identity verification
- Management information tools
- Transaction reporting tools
- Regulatory reporting tools
- Activity monitoring tools
- Training tools
- Risk data warehouses
- Case management tools
- Horizon scanning
- Transaction monitoring
- Sanctions screening
- Payments screening
- Product requirements governance
- Product legal information management
- Staff survey tools
- Compliance registers
RegTech Future Trends
RegTech has become one of the hottest topics over the last few years. RegTech will continue to evolve and grow as a bigger market as financial institutions work hard to stay compliant with new and existing regulations. According to research reports, the global RegTech market is expected to total more than US$20 billion by 2027. The reasons behind the growth of the market are given below.
- Increasing regulatory requirements would force financial intuitions to increase their spending on technologies.
- Ballooning cost of compliance and hefty regulatory fines would prompt companies to increased use of modern technology such as AI and machine learning.
- Banks’ reliance on technology would increase in the post-COVID situation as remote working is poised to become a common trend.
- Increased funding for RegTech companies would lead to better research and development, resulting in highly efficient compliance solutions. RegTech solutions can provide unmatched analytics driven by technologies such as Big Data, which can help firms make informed decisions quickly.
With RegTech companies keeping up with their promises on efficiency and effectiveness improvements, the industry is poised to achieve big in the coming years. RegTech is emerging as a standalone industry, increasingly distancing itself from the parent FinTech. RegTech companies are innovating further and coming up with cutting-edge solutions that can address compliance issues like never before. A growing number of financial institutions are embracing the new technology advances in the compliance space. For the remaining, RegTech has become a must-have to remain competitive and relevant.
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