Regulatory norms are rapidly morphing and escalating in complexity, amplifying compliance costs and challenging expanding operations. The current market’s aggressive nature underscores an urgent necessity for compliance, a need that has grown even more pronounced with the accelerated emergence of novel technologies.
The potential and impact of Regulatory Technology (RegTech) is becoming increasingly evident in the global financial services sector, thanks to practical applications that yield tangible benefits for businesses, consumers, and regulatory bodies alike. Despite this, to fully capitalize on the benefits of RegTech, substantial hurdles must be addressed.
The creation of an innovative environment and the realization of RegTech advantages require a coordinated and balanced approach. All players within this multifaceted ecosystem need to evaluate their standing and contemplate actions that could facilitate the wider adoption of RegTech.
Regulatory Technology, often referred to as RegTech represents a niche of tech solutions specifically designed to assist in regulatory compliance across various sectors. It leverages advanced technologies like artificial intelligence, big data, machine learning, and cloud computing to automate compliance processes, thereby enhancing accuracy and mitigating risk.
RegTech, in banking, refers to the use of advanced technologies to enhance and streamline regulatory processes within the banking sector. It involves leveraging software solutions to automate compliance tasks, manage regulatory risks, and more effectively handle the vast amounts of data banks deal with regularly.
RegTech has seen an influx of regulations since the 2008 financial crisis. In the aftermath of the crisis, banks were compelled to rapidly implement manual processes to meet new reporting requirements, giving rise to an increase in both the demand for skilled resources and the cost of compliance.
With the advancement of technologies like artificial intelligence (AI), machine learning (ML), and blockchain, RegTech solutions in banking are becoming more sophisticated, offering greater automation, accuracy, and speed in handling regulatory compliance requirements.
The primary goal of RegTech in FinTech is to automate compliance tasks, manage regulatory risks, and effectively deal with large volumes of data. This results in reduced manual efforts, lower operational costs, minimization of errors, and improved overall efficiency in the compliance process.
According to the Global RegTech Industry Benchmark Report, a significant shift has been observed recently in the adoption of RegTech. Although the banking sector has been a major adopter, with around 94% of RegTech vendors catering to their needs, an increasing number of vendors are extending their services to other FinTech companies.
Specifically, about 49% to 68% of vendors are now serving the broader FinTech sector, illustrating the expanding role and relevance of RegTech beyond traditional banking.
RegTech is important because it helps financial institutions comply with regulations and rectify potential discrepancies more efficiently. This technology can swiftly process large volumes of data, which could be challenging for a conventional compliance team.
It enhances the company’s internal operations by increasing its ability to address compliance performance issues and provides a safeguard against various risks.
Moreover, RegTech improves precision by offering a more streamlined and simplified process than traditional, manual methods, thereby reducing the possibility of human error. Regular reports and accurate insights foster a more transparent culture of compliance within the organization.
Regulatory Technology, or RegTech, has witnessed a transformative journey since its initial applications in the Financial Technology sector. Following the swift advancement of the finance domain, RegTech was introduced to streamline and automate regulatory processes. However, the scope of RegTech has since grown exponentially, now enveloping diverse industries such as transportation, healthcare, energy, retail, and tourism.
According to Juniper Research, as of 2022, the global expenditure on RegTech stood at $68 billion, and this figure is projected to skyrocket to an impressive $204 billion by 2026. This steep rise reflects the increasing reliance of industries on technology to navigate complex regulatory landscapes.
Moreover, the projected expenditures indicate that RegTech solutions will constitute about 50% of global regulatory compliance budgets by 2026. This growth not only signifies the evolving role of RegTech across various sectors but also underscores its potential in shaping the future of regulatory compliance and management.
The RegTech investment landscape has witnessed remarkable growth, with GlobalData reporting that total RegTech deal value soared to $3.8 billion in 2021 from $605 million in 2020, marking a growth exceeding 500%. Born from the fintech revolution, RegTech embodies a distinct segment that aims to enhance regulatory compliance processes through innovative technological solutions.
Since the first quarter of 2021, RegTech deals experienced a significant surge, rising to $1.2 billion from $269 million in Q4 2020, indicating a growth of roughly 360%. This influx can be credited to the heightened compliance obligations under new regulations such as MiFID II, GDPR, and SFDR, among others.
In the context of noteworthy deals, the acquisition of Fenergo, a firm specializing in client data management, client lifecycle management, and AML or KYC tax compliance solutions, by Astorg and Bridgepoint from Insight Partners stands out. Valued at $1.5 billion, it represents one of the largest RegTech deals since 2020.
Surveying the overall investment atmosphere in RegTech since 2020 reveals venture financing deals as the majority, constituting 45 out of 89 deals and amassing nearly $2.9 billion in deal value. This is then followed by acquisitions and private equity deals, showcasing a dynamic and promising landscape for RegTech investments.
RegTech and FinTech are often viewed as intertwined, with some even considering RegTech as a FinTech subcategory. However, despite their concurrent evolution, they serve unique purposes in the financial ecosystem.
FinTech, at its core, applies technology to deliver financial services more efficiently. It is the engine that powers digital transactions between end-users and financial institutions. Conversely, RegTech focuses on the regulatory and compliance aspects of these financial operations. It provides the oversight mechanism, tracking transactions, and customer onboarding procedures to prevent financial misconduct.
RegTech is instrumental in streamlining the screening and monitoring process for multiple entities and clients during different stages of transactions. It oversees client activities, scrutinizes data, and evaluates risk, serving as the eyes and ears of the intricate landscape of financial transactions. When properly implemented, RegTech not only simplifies the process but also reduces costs and enhances the accuracy of risk assessment and compliance practices.
Thanks to technological innovations, an array of application areas have opened up for RegTech implementation, including capital management, cybersecurity, risk management, operations, and regulatory reporting, to name a few. Let’s delve into three key categories.
Risks are evolving swiftly and their interplay can have a significant effect on business operations. Incorporating RegTech into risk management strategies provides an advantage needed to mitigate and manage these risks using inventive, data-driven solutions. RegTech proves to be a game changer in handling various risk functions.
A few examples of RegTech in risk management include but are not limited to cyber-risk management, credit risk management, market risk management, fraud-risk management, and reputational risk management, among others.
Unquestionably, effective governance is crucial for any regulated entity to operate responsibly, ethically, and transparently. This involves the establishment of policies, procedures, and controls that form the bedrock for decision-making, risk management, and accountability.
At the heart of RegTech’s mission is addressing regulatory compliance. For example, in the context of India, regulatory compliance comprises three elements – maintaining an inventory of regulatory obligations, managing identities, and conducting regulatory reporting. These components ensure adherence to the regulatory landscape and are fundamental to any RegTech solution.
Around the globe, financial services regulators have initiated a multitude of measures to promote awareness of RegTech advancements, highlight its benefits, and expedite its acceptance within the industry.
The Reserve Bank of India (RBI) has implemented numerous strategies to simplify regulatory compliance and promote innovation via the Regulatory Review Authority 2.0 (RRA). Key actions include:
TechSprints, initiated by the Financial Conduct Authority (FCA), are events aimed at spotlighting issues and raising awareness about existing RegTech solutions. They serve as a platform for global RegTech companies to collaborate and brainstorm solutions for intricate problems. Moreover, the FCA organizes showcase days, inviting both emerging and established RegTech and FinTech firms to present their solutions to industry experts.
The Ontario Securities Commission established a specialized center named LaunchPad, dedicated to assisting emerging companies navigate the intricate labyrinth of the regulatory structure. This hub is specifically focused on supporting fintech startups.
The Australian Securities and Investments Commission (ASIC) put forward a consultation paper proposing additional measures to foster innovation within the financial services sector, including a regulatory sandbox license exemption. To dismantle particular obstacles to financial innovation, ASIC plans to alter its policy on licensee organizational competence.
This would allow heavily automated businesses to meet their competence requirements through third-party professional compliance certification. Furthermore, the proposed regulatory sandbox would provide startups with a platform to test their services.
The evolution of RegTech promises heightened automation, uniformity, and simplification spanning various organizations and sectors. As financial institutions innovate with new products and services, the likelihood of additional regulations and associated compliance costs also escalates. This trend is prompting businesses to explore novel alternatives to their current tech capabilities to effectively meet regulatory mandates.