Regulatory technology, also known as "RegTech" is using technology, particularly information technology, in the context of regulatory monitoring, reporting and compliance benefiting, in the immediate future, the finance industry. RegTech companies aim on finding solutions that address regulatory compliance challenges through technological innovation. Usually these companies utilise the cloud through software-as-a-service.
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RegTech to date has been focused on the digitization of manual reporting and compliance processes, for example in the context of know-your-customer requirements. This offers tremendous cost savings to the financial services industry and regulators. However, a academic paper, FinTech, RegTech and the Reconceptualization of Financial Regulation, it was submitted that the potential of RegTech is far greater – it has the potential to enable a close to real-time and proportionate regulatory regime that identifies and addresses risk while also facilitating far more efficient regulatory compliance. RegTech transformative potential will only be fully captured by a new and different regulatory framework situated at the nexus of data and digital identity. The developments in FinTech, the tremendous changes in emerging markets, and the recent pro-active stance of regulators (for instance with the development of regulatory sandboxes), may potentially combine to facilitate a transition from one regulatory model to another.
Origin
At a governmental level, the FCA was the first governmental body to establish and promote the term RegTech, defining this as: "RegTech is a sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities".
In March 2015, a report by the UK Government Chief Scientific Adviser, stated that "FinTech has the potential to be applied to regulation and compliance to make financial regulation and reporting more transparent, efficient and effective – creating new mechanisms for regulatory technology, RegTech".
Yet the vision of a technology led regime has already been proposed as early as 2014, by Andy Haldane, during a keynote address at Birmingham University
I have a dream. It is futuristic, but realistic. It involves a Star Trek chair and a bank of monitors. It would involve tracking the global flow of funds in close to real time (from a Star Trek chair using a bank of monitors), in much the same way as happens with global weather systems and global internet traffic. Its centerpiece would be a global map of financial flows, charting spill-overs and correlations.
On the private sector side, two pressure points have facilitated the development of RegTech. On the expense side, post-crisis fines have exceeded US$200 billion, and the ongoing cost of regulation and compliance has become a primary concern industry-wide. On the revenue side, competition from FinTech companies is expected to put US$4.7 trillion of revenues at risk. These expense and revenue factors are driving the development of RegTech. As with FinTech, the 2008 GFC represented a turning point in the development of RegTech. However, the factors underlying, and the beneficiaries of, RegTech are quite different. FinTech growth has been led by start-ups (now increasingly partnering with, or being acquired by, banks and other traditional financial institutions), whilst RegTech developments to date are primarily a response to the huge costs of complying with new institutional demands by regulators and policy-makers.
For the financial services industry, the cost of regulatory obligations has dramatically increased, such that 87% of banking CEOs in one survey consider these costs as a source of disruption. This provides a strong economic incentive for more efficient reporting and compliance systems to better control risks and reduce compliance costs. Furthermore, the massive increases in the volume and types of data that have to be reported to regulatory authorities represent a major opportunity for the automation of compliance and monitoring processes. For the financial services industry, the application of technology to regulation and compliance has the scope to massively increase efficiency and achieve better outcomes.
Recent developments
BBVA, which hosted a RegTech innovation lab, quoted recently, "Regtech solutions also allow banks to boost their responsiveness to regulatory changes, because they are, in theory, designed to adapt dynamically to new requirements in an almost immediate manner". Earlier, in March 2016, BBVA made the following statement in its paper titled "Banking Outlook":
"The term RegTech refers to a set of companies and solutions that marry innovative technology and regulation to address regulatory requirements across industries, including financial services. RegTech companies focus on the automation of manual processes and the links between steps in analytical/reporting processes, the improvement of data quality, the creation of a holistic view of data, the automated analysis of data with applications that are able to learn during the process, and the generation of meaningful reports that can be sent to regulators and used internally to improve key business decision making."
Key characteristics
Here are some of the key characteristics of RegTech:
- Agility – cluttered and intertwined data sets can be decoupled and organised through ETL (Extract, Transfer Load) technologies
- Speed – reports can be configured and generated quickly
- Integration – short timeframes to get solution up and running
- Analytics – RegTech uses analytic tools to intelligently mine existing “big data” data sets and unlock their true potential e.g. using the same data for multiple purposes.
Applications
RegTech can have applications such as:
Startup developments
As soon as RegTech sub-set first appeared, a number of companies have been spawning in order to tackle various regulatory problems.