As the global markets grows in complexity and the threat of sophisticated cyberattacks escalates the amount of new financial regulation has skyrocketed. Keeping current with all of these new provisions is a costly and complicated endeavor — one with no end in sight.
According to Martin Arnold of the Financial Times, “Big banks, such as HSBC, Deutsche Bank, and JPMorgan, spend well over $1bn a year each on regulatory compliance and controls. Spanish bank BBVA recently estimated that on average financial institutions have 10 to 15 per cent of their staff dedicated to this area.”
RegTech is the new concept that is revolutionizing financial technology. RegTech is paving the way for a new wave of startups that, leveraging technologies such as cloud computing or big data, are looking to save banks a lot of the time and resources they devote to ensure regulatory compliance.
President Trump has said that he wants to dismantle the Dodd-Frank Act, a massive piece of reform legislation passed by the Obama administration in 2010 in response to the financial crisis, though he has not detailed how he would fulfill that pledge.
The biggest challenge affecting financial services firms today is regulatory compliance. The opportunity that RegTech offers in this space is game-changing but the variety of available solutions is vast and constantly evolving; the implementation process is also fraught with challenges.
“What I think we’re seeing is that the term ‘RegTech’ is expanding rapidly because regulation touches so many different industries but new technologies help solve it. For example, with new, rapidly evolving technologies, like AI, ML, and blockchain, now available to help solve compliance problems, RegTech is a good, unifying way to think of the space.” – Michael Rice
The FCA [Financial Conduct Authority] in the UK has taken the lead by developing a ‘sandbox’, in which FinTech and RegTech start-ups can experiment with new technologies without fear of regulatory infringement. This process may require systems to be run in parallel for a time to prove the concept.
Regulators in other countries, like Singapore and Australia, are now following suit.
Why RegTech is important for financial services firms
“By making compliance less complex and capacity-demanding, RegTech solutions could free capital to put to more productive uses,” the Institute of International Finance (IIF) said in a recent report on RegTech. It could also make it easier for new companies to enter the market, the IIF said, and make regulation work better.
Not only does RegTech seek to address the multiplying compliance obligations in a cost efficient manner, but it is nurtured and supported by governments. The UK is a great example of where this is happening. The Financial Conduct Authority (FCA) provided clarifications on the steps regtech companies must take to comply with UK regulations and have collaborated with firms through partnerships with financial institutions, accelerators and academics.”
Democratizing access to RegTech is something that Suade, a Microsoft Ventures startup, is trying to do. The firm wants to help big and small banks alike adapt constantly to changes in regulation and become more cost effective. While new regulations are designed to bring transparency and stability to the financial sector, the practical cost and logistics Financial Institutions (FIs) need to invest in understanding them is massive. Suade wants to help take care of that, leaving banks to focus on serving their clients.
A few more emerging RegTech applications are worth highlighting:
- IBM Surveillance Insight for Financial Services helps identify individual employees who may pose compliance risks. IBM Surveillance Insight is a “cognitive reasoning engine” that uses AI to contextualize disparate signals. It can analyze both unstructured data — employee email, chats, and voicemails — and structured data, like trade transactions, to create a 360-degree view of activity at a firm, raising awareness of potential blind spots.
- Salesforce Shield is a series of compliance features that Salesforce added to its software to help firms adhere to the Department of Labor (DOL)’s new fiduciary rule.
- OpenFinance examines global industry data about investment portfolios, asset management, and transactions so banks can understand which businesses and customers are most likely to be affected by new regulations — a mammoth task for compliance departments.
- Trulioo offers identity verification for people in over 40 countries.
- Silverfinch “creates connectivity between asset managers and insurers through a fund data utility in a secure and controlled environment.”
- Passfort allows you to store and manage all of your account’s keywords from a secure keyword.
- Trustev delivers fraud prevention solutions online by scanning transactions in real time to determine their legitimacy.
- Corlytics provides compliance risk analysis for financial institutions.
- KYC Exchange is a KYC data collection platform.
- Cappitech has trading and regulatory reporting.
- OSIS gives you credit risk analysis and regulatory reporting.
Last year, Citigroup used an artificial intelligence system from Stanford University spin-out Ayasdi to help it pass the US Federal Reserve’s stress test, having failed it the previous year. Ayasdi’s system — also used by the pharmaceuticals industry — uses topology, a sub-field of mathematics that studies shapes, to recognize patterns in data and find complex relationships.
Since more RegTech technology is cloud-based, it opens up more chances for startups to offer these solutions, creating a low barrier to entry and helping to spread its application around the world. Global financial organizations are intent on helping RegTech companies who may solve their issue of multiple locations and various compliance issues in each market.
Blockchain within the growing RegTech ecosystem
There are a wide variety of technologies being used in RegTech solutions. However, they all need to be cloud-based. This will ensure that they are responsive and flexible enough. This includes big data, data visualization, as well as blockchain technologies used as immutable ledgers of shared information.
The industry is ripe for further blockchain disruption, specifically around using the technology to manage compliance and regulation, and capacity of blockchain to become the ultimate disruptive technology for fund managers and banks in terms of payments and compliance.
— FarFromTV (@FarFromTV) December 3, 2016
The global financial regulators have a role to play in driving companies into emerging RegTech and blockchain technologies. However, all regulators are in different places in terms of their application of technology and, in some cases, their knowledge of technology is low.
The rise of RegTech in 2017 will be the tipping point that drives firms to automate.
Certain financial ground rules, including stamping out insider trading and stopping money laundering, are here to stay. Firms generally understand that automation makes sense and that they should be pushing for it, but automating systems is hard to do. Many do not have the time or budget to keep up with the flood of new regulatory mandates.
For RegTech to be successful now and into the future, it must be fully supported by governments and regulators all over the world.
There are considerable opportunities for RegTech as it is anticipated that regulation will only continue to increase with more demand to oversee data, reporting, and operational processes. Fund managers and banks are also looking at supporting and partnering with RegTech startups to address the growing regulatory and compliance demand as well as assist in spreading adoption of RegTech solutions for payments and governance.
Overall, the belief is that RegTech will continue to experience growth globally with many predicting the beginning of fundamental, tech-enabled transformation of the middle and back office.
Participate in the NYC RegTech Meetup: RegTech Open Forum: What Is RegTech?
Tuesday, January 24, 2017 at 7:00 PM
ThoughtWorks @ 99 Madison Ave., 15th Floor, New York, NY