RegTech and FinTech are buzzwords that seem to be peppering conversations and literature in the financial services industry. Whilst financial institutions are scrambling to develop their own FinTech, sign up FinTech providers, or set investment strategy to go headlong into FinTech investments, the economy of financial and regulatory technology has triggered a Klondike-like rush within the industry. There is a growing micro economy surrounding both RegTech and FinTech in terms of lawyers, developers, security consultants, fund management, regulation, strategists and so on.

What is RegTech?

Before we look at the subject of RegTech, let us briefly consider what it is.

 

Regulatory Technology is the application of scientific capability as a practical solution to the regulatory challenges facing financial institutions. Given the staggering volume and frequency of regulatory and technological changes that have taken place over the past ten years, it is somewhat inevitable that RegTech should become such a phenomenon. It has, however, been around for decades, just in a far less obvious or commoditised way.

The boom of any industry often yields a cautionary tale and the same may well be said of FinTech and RegTech. When entrepreneurs see a business opportunity they dream up RegTech solutions, believing them to be the “next big thing”; as financial institutions see and hear the buzz around RegTech, they often hop on the bandwagon in fear of being left behind; as regulators see RegTech solutions through their supervision work, they set unwritten benchmarks on adequate systems and controls; and as developers latch on to the RegTech boom, they often develop solutions in the latest technology of AI, Blockchain and so on.

The question to consider is: “are financial institutions, and indeed all consumers of RegTech, buying and deploying what they need both now and for the future?”

What RegTech do you need?

Some of the broad types of solutions that are on the market are shown here:

These are just some of the available solutions with still many more not mentioned here, including multiple solutions combined in a single package. Firms need to be clear why they need RegTech in the first place and ensure they employ a solution that has a practical purpose for the regulatory challenges specific to their business. For example, whilst a bank or a brokerage needs a solution that handles frequent and large volume transaction monitoring with, perhaps, ongoing sanctions screening, this would not be necessary for a boutique corporate finance house that handles ten advisory deals in a year.

In the UK and in the most advanced regulatory jurisdictions around the world, regulations are written on a principle basis, which leaves them flexible enough for application in a proportionate manner to each firm’s business and risk profile. This regulatory model allows firms to be intelligent in managing their regulatory risk, and it is this principle-based, risk-aware mindset that will help firms employ the right solutions when considering RegTech.

So, where to begin when deciding on whether you need a RegTech solution? The answer lies in the definition of the term: technology is deployed to provide a practical solution. Begin by considering what regulatory challenges your firm has in terms of efficiency, time, cost, consistency and reliability in delivering controls. Looking at the transaction monitoring example earlier, it is clear that most banks cannot efficiently or effectively monitor all transactions and screen all customers using human resource. RegTech would provide the solution.

Smaller, Non-complex Organisations

Many smaller or non-complex organisations do not see the need for RegTech, yet at the same time, worry about the growing regulatory requirements and consider the cost of compliance as “killing the industry”. This cost comes through staffing, spending time on regulatory matters, record keeping and general compliance firefighting. For these organisations, which have small and often non-dedicated compliance functions, the need for single task complex RegTech solutions is limited, however even these firms are coming around to the fact that there are simple workflow solutions that can automate many of the administrative compliance tasks efficiently and effectively. This approach releases experienced resources to continue to add value to the business, rather than spending time populating spreadsheets, chasing colleagues and trying to retrieve and report compliance data. In our experience, the deployment of appropriate RegTech in small to medium-sized enterprises (“SMEs”) can save time and money, whilst enhancing controls and pushing businesses forward.

Legacy Systems and Dated Technology

One of the biggest problems facing the very large financial institutions is the existence of multiple legacy systems that are both outdated in terms of technology (think mainframe computers) and also operate in siloed functions that cannot intercommunicate. The mainframes serve a vital function for the large firms and are currently indispensable, but this leaves them less agile than newer or smaller firms and the enormous wealth of data is fragmented across possibly hundreds of systems. For those firms, the problem is akin to the organic growth of old cities compared to the well-structured planning of new cities, where the infrastructure grew over time, rather than in a planned manner.

Whilst the largest firms and banks have the unenviable task of updating and consolidating their legacy systems on an enormous scale, smaller and less complex organisations also face the same challenge in relative terms. We often come across firms that have multiple RegTech solutions, each handling a specific task in isolation. Whilst each system performs its task well, it often does so in a silo, and doesn’t interact with other systems. Further, there are other problems with this model: multiple service contracts, fragmented data, staff skills required to operate each system, multiple points of failure to manage and increased cost.

What should I do about RegTech?

No organisation likes operational change, but in cases where a firm is using multiple systems to perform individual tasks, it would be worthwhile to question the added cost benefit of those systems.

Ask relevant questions:

  • What do the systems actually do for you?
  • Do they manage your risk by facilitating a regulatory process that can’t effectively be delivered by your own employees?
  • Do the systems meet your current and near-future requirements?
  • Are you considering additional systems to perform tasks your current systems cannot?

These are important questions because there is a likelihood that another system can provide you with multiple solutions in one place at an economy of scale.

The number of RegTech firms out there is growing and you should outline what you believe you need before talking to any of them. Most of the RegTech firms are pure software companies that don’t fully understand the complexity of regulations and how those regulations apply to your firm. They certainly don’t understand the proportionality of the regulations and will typically demonstrate their solution as they expect it to be applied, rather than in application to your company’s needs.

There is also a case of Emperor’s New Clothes in the RegTech world. Firms boast of their latest technology via Blockchain, AI, machine learning and so on, with many people reluctant to defy or question these acclaimed new technologies. In the vast majority of cases, you most likely do not need the latest and most complicated solutions on the market.

An informed RegTech provider will typically try to understand your challenges and then set about describing how their solution can solve that challenge. More insightful RegTech providers will do just that, but also introduce capabilities that you hadn’t thought of that would add value to your business.

How can CCL help?

In addition to being one of the longest-standing specialist regulatory consultancy firms, CCL is a provider of RegTech, offering a solution that provides answers to many of the challenges faced by regulated firms. We know intimately what our platform offers and how it can help firms, so the first question we ask when meeting prospective clients is “what problems are you looking to resolve?”. Often the response is that the firm is not entirely sure what they need. Our vast experience as compliance consultants helps define whether our platform can help our clients, as well as perhaps introducing them to a more suitable provider.

If you would like to discuss the growing cost of compliance, or indeed discuss how RegTech can help your business stay compliant, please do not hesitate to contact us.

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