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RegTech – New Opportunities From the World of FinTech

RegTech – New Opportunities From the World of FinTech

May 01, 2017

The term FinTech has recently become frequent newsworthy focus.  Likewise, through innovation, the term RegTech is also emerging as industry jargon.  In the financial services industry, the two terms are often considered to be related.

More Than Just a Word

RegTech has been described by the Financial Conduct Authority (the United Kingdom’s regulator) as “the adoption of new technologies to facilitate the delivery of regulatory requirements.”  The Institute of International Finance noted in its March 2016 report, Regtech in Financial Services: Technology Solutions for Compliance and Reporting, that RegTech is “the use of new technologies to solve regulatory and compliance requirements more effectively and efficiently.”  It encompasses leveraging software agility, cloud-based storage, and new technological advances to address global regulatory challenges. 

Leveraging the Old to Develop the New

As some experts have noted, the definition of RegTech would indicate that there are already RegTech tools in place, with some existing for years.  This includes various software for anti-money laundering, customer data analytics and fair lending analysis, and annual percentage rate and yield calculations.

The current innovations in technology encompass new attributes that often include not only complex decision-making analytics but also self-learning capabilities.  This means these innovative solutions learn with each transaction or event and ascertain potential parameter changes.  These RegTech innovations also leverage capabilities within cloud computing, big data analytics, and data networking.  Plus, given the nominal cost of computing power and the utilization of artificial intelligence applications, RegTech growth is projected to be exponential over the next few years.  Specific events are driving the design, development, and implementation of this type of innovation.  The Great Recession, the ongoing increase in regulatory requirements, changes in global financial systems, and the introduction of new products and services as well as new providers are all contributors.

The Benefits

Currently, larger institutions and/or large data service providers are implementing, testing, and offering some of these tools.  As noted in the Institute of International Finance March 2016 report, there are many diverse benefits in using RegTech.  As examples, the following compliance and regulatory reporting focuses were cited:

  • Monitoring Payment Transactions.  There is value in learning about inconsistent payment data streams that occur in huge volumes each day.  Monitoring these transactions can provide information that results in cost reduction, time efficiencies, and enhanced anti-money laundering and terrorist financing monitoring.
  • Risk Data Aggregation.  Financial institutions face increasingly complex capital and liquidity reporting requirements, including stress testing scenarios.  RegTech solutions could offer methods to bridge internal institution definitional and accounting issues and to gather data from incompatible and/or outdated systems.
  • Identifying and Implementing New Regulations/Requirements.  Utilizing RegTech solutions, financial institutions would have tools to assess implications of regulatory changes, map specific impacted controls, analyze data requirements, and ascertain high-risk areas.
  • Modeling, Forecasting, and Specific Scenario Analysis.  Separate from capital and liquidity regulatory reporting requirements, financial institutions have other internal and external reporting obligations.  The emphasis on enhanced risk management practices also requires modeling and detailed risk analysis.  Through RegTech solutions, senior management would have greater choices in analyzing various scenarios, risks, and projected changes.  New products and services could also be risk analyzed and stress tested through a much greater range of possible scenarios.

In addition, there are other important aspects of RegTech solutions to leverage and utilize, from monitoring high-risk customers to monitoring the internal risk posture of the institution. 

What’s Next on the Horizon?

The search continues for more solutions, both in terms of depth and breadth, as well as ways to reduce the cost of RegTech development and utilization.  In the coming months, anticipate news on RegTech solutions leveraging one or more of the following:

  • Robotics, artificial intelligence, and machine learning
  • Biometrics
  • Distributed ledger technology and blockchain
  • Application programming interfaces
  • Chatbots and robot advisors
  • Cryptography
  • Cryptocurrencies, e.g., bitcoin
  • Shared utilities and cloud applications 

That’s the short list for now; a year from now, there will undoubtedly be more solutions.  RegTech innovations and implementations will be far reaching and impact all segments of financial services transactions.  These tools will assist with compliance challenges in ways we can’t even imagine.

Author(s)

Jerry Miller
Jerry Miller, CRM, CRP, CRCM, AMLS
Partner
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