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The Rise Of Regtech: Bringing Technology To Managing financial Regulation

Alex Jablokow| July 11 2017

| IT insights

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With flexibility, low costs, and clear reporting, regtech solutions might be the answer to all of our financial service problems. 

Monitoring and acting on compliance and regulatory requirements takes a lot of time and effort for financial service companies. It is estimated that governance, risk, and compliance costs make up 15 to 20 percent of bank operating costs.

Application of software, big data analytics, and the internet to financial services, known as fintech, is seriously impacting transactions, lending, and decision making in financial services. Now, “regtech” companies are popping up. These are companies that automate compliance and regulatory-related activities in finance, healthcare, and other markets.

Although less sexy than developing new funding models, there is arguably more potential for progress in managing regulation through technology.

While fintech companies are often in competition with bank and financial service firms, regtechs are designed to work along with banks. They can also enable cooperation between financial institutions to share common, non-competitive information, saving costs for everyone involved.

2008 and All That

The financial crisis of 2008 resulted in a large increase in financial regulation: U.S. banks exceeded $200 billion in fines between the crisis and late 2015. In an attempt to fix this, banks and other financial service providers are expending more money and effort on compliance and regulatory risk management.

Financial institutions, particularly large global banks, are desperately seeking effective tools to help deal with an increase in complex compliance demands worldwide. Regtech companies have developed the technology to meet their needs.

Benefits to Financial Service Firms

Ideally, a regtech solution will include most of the following benefits:

  • It will be cheaper and less resource intensive than the current system through standardizing processes, noting deviations early on, and eliminating duplicates.
  • Be flexible enough to expand and change as the firm grows and regulatory requirements change. It should clarify when the old risk models have become inadequate and new ones are necessary.
  • Allow for modeling and anticipating the effects of upcoming or planned regulations.
  • Support processes that keep personal information secure. Customer identity management will improve overall customer relations as well. It will reduce the costs and time for onboarding a new customer, particularly a large institutional customer.
  • Provide clear and actionable reporting of both potential risks and compliance overall, making regulatory submissions significantly simpler.

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Areas of Regtech Service

Regtech companies have sprung up to handle various areas of automating regulatory compliance, some more complex than others.

Monitoring Regulatory Changes

Regulatory requirements are complicated. They’re constantly changing and often differ from one jurisdiction to another. Some regtechs specialize in this area. They focus on monitoring the global regulatory landscape, assessing the impact of new regulations, and providing financial institutions with aggregated data.

Reporting and Risk Management

Within the bank, regtechs support risk data aggregation and reporting. These vendors do modeling, scenarios, forecasting, and provide risk management tools.

Read: The GDPR And US Data Protection Regulations Diverge

Monitoring Clients and Transactions

If prospective customers were always honest, monitoring risk would be easy. But, that isn’t the reality. Things happen, like laundering illegal money or using money to finance terrorism, which spurs specific regulations for each potential issue.  

Regtechs that assist in accurate identification of clients match proprietary bank data against everything from credit and commercial databases to social media and biometrics to minimize risk.

Regulatory Formulation

Financial institutions aren't the only ones that use regtech. Regulators also want to streamline operations, achieve their risk-reduction goals without adversely affecting bank operations, and enable more automatic supervision of markets and firms.

KYC compliance can be an expensive process. If utilities and data can be shared between institutions, overall acquisition of this information will be cheaper for everyone in the market. Consistent, well-defined data can also make it easier for a regulator to request and receive time-sensitive information when necessary.

A Global Market

Regulation is one product that is produced and consumed everywhere in the world, and its production will only increase. Fortunately, the costs of complying with that regulation will go down. These regulations themselves may even become more focused and efficient - all the result of new regulatory technology.

 

 

Topics: IT insights

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THIS POST WAS WRITTEN BY Alex Jablokow

Alex Jablokow is a freelance writer who specializes in technical and healthcare business. He blogs about the Internet of Things, software, inertial guidance systems, and other topics for business clients. Sturdy Words, his freelance content business, is at www.sturdywords.com.

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