Customers, entrepreneurs and financial institutions have all felt the impact of FinTech over the last several years. In fact, it’s banks are expected to invest more than $20 billion on technologies by 2017. RegTech is one of the more recent technologies involved in the FinTech revolution.
In this article, we’re going to define RegTech, share its origins and explore how it’s going to impact and benefit both customers and businesses.
What is RegTech?
The Financial Conduct Authority (FCA), a regulatory body in the United Kingdom, describes RegTech as the “adoption of new technologies to facilitate the delivery of regulatory requirements.”
“I would define it as technological advancement that assists those focused on compliance and regulatory-related activities in their professions,” Kari Larsen, counsel at Reed Smith LLP in New York, and formerly in the Enforcement Division of the Commodity Futures Trading Commission, tells Bloomberg BNA. “So making it easier, swifter, more complete, more efficient to monitor compliance and regulatory obligations.”
Alan Meaney (CEO of FundRecs) further explains in a Deloitte report that “Like FinTech, PayTech and many other combinations of XXXTech, RegTech is another example of an industry that is being changed rapidly by software. There has been technology used at various levels in the Regulatory space for over 20 years. However, what the new RegTech label recognises is that the gap between software and non-software enabled services has widened significantly.”
Javier Sebastián, BBVA Research’s expert in digital regulation, adds that companies who are “harnessing the capabilities enabled by new technologies such as cloud computing, big data and blockchain, are devising solutions to help companies across all sectors of activity ensure that they comply with regulatory requirements. In the financial sector, RegTech is deemed a subarea of what is generically known as FinTech.”
Despite the fact that technology has been used to address regulatory requirements, RegTech, according to Deloitte, is an exciting development that contains the following characteristics:
- Agility — Cluttered and intertwined data sets can be de-coupled and organised through ETL (Extract, Transfer Load) technologies.
- Speed — Reports can be configured and generated quickly.
- Integration — It offers short timeframes to get solution up and running.
- Analytics — A recent Deloitte report quoted biologist Edward Wilson “We are drowning in information, while starving for wisdom”. 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.
As the Deloitte report continues, “Data is meaningless unless it is organised in a way that enables people to understand it, analyse it and ultimately make decisions and act upon it i.e. by creating consumable information.” Ultimately, RegTech will be use those characteristics and information to enable more efficient and effective regulation and compliance.
The origins of RegTech
Numerous events led to the development of RegTeech. “The credit crisis of 2008 and the heavy level of financial services regulation that followed created a perfect vacuum of innovation in banks,” writes Falguni Desai in Forbes. “Following the credit crisis, banks have been slapped with several new regulations and dealt heavy fines and penalties for non-compliance.” Because of this, banks have been forced to “pay more attention to their back offices and spend more on compliance and risk management programs than ever before.”
“For many years post-crisis, the only growing area of personnel, of hiring, in banks was in compliance,” Andres Portilla, IIF’s managing director for regulatory affairs, told Bloomberg BNA. By November 2015, the FCA issued a “call for input” on developing regtech. The result? The formation of a RegTech working group by the IIF.
“It’s not a coincidence that we are seeing things more in regtech and in fintech at the same time,” says Bart van Liebergen, IIF’s associate policy adviser for regulatory affairs and also a member of the working group. “We are seeing improvements in technology across the board — and we are seeing them used, on the one hand, in new funding models and on the other hand, ventures are saying, ‘Hey, we can use this in compliance as well.’
What technologies are essential in a RegTech solution?
There are a wide variety of technologies being used in RegTech solutions. However, as Sebastián points out, “they all need to be cloud-based.” This will “ensure that they are responsive and flexible enough.This includes big data and data visualization techniques as well as blockchain technologies used as immutable ledgers of shared information.
Other applicable technologies, according to Bloomberg BNA, include machine learning, “biometrics, the interpretation of unstructured data such as e-mails and Facebook posts, and the use of application programming interfaces (APIs).” These tools will be used for “aggregating big data, modeling risk for bank stress-testing, monitoring of capital-requirement compliance, updating compliance manuals, improving anti-money laundering and know-your-customer (KYC) programs and preventing fraud and in-house violations.”
BBVA Research noted some other technologies involved in RegTech. For example, there is data mining and analytics tools, such as machine learning, computational statistics, complexity and statistical physics algorithms (also known as deep learning). Visualization tools assist in the understanding and reporting of multiple heterogeneous data sources while not requiring programming skills. Then there…