Regulatory Technology, or RegTech, is an emerging technology focused on solving the problem of regulatory compliance. In its early stages, RegTech is still considered a rapidly developing solution. It leverages machine learning, blockchain, AI, and various other enabling tech stacks to transform regulatory compliance digitally.
According to a report by Thomson Reuters, a new regulatory update is implemented every 7 minutes. Banks also face severe and frequent fines for non-compliance, making meeting regulatory requirements urgent and important.
The US Securities and Exchange Commission (SEC) administered a staggering 862 enforcement actions in 2019 related to violations of securities laws and regulations. The same year across the pond, the UK’s Financial Conduct Authority issued its largest personal fine in the institution’s history, at a staggering £76 million.
This underscores the importance of complying with regulations and the need for tools that simplify the process. RegTech has rapidly emerged as a solution to the financial industry’s needs.
RegTech is steadily gaining popularity in the sector. This guide will help you understand what these tools do and how they aid Risk and Compliance teams with regulatory compliance matters.
A Brief History of RegTech
Introducing new regulatory requirements
The Dodd-Frank Wall Street Reform and Consumer Protection Act is largely considered to have ushered in a new wave of regulation. Following the 2008 collapse of Wall Street and the ensuing global economic instability, the US government sought to create guardrails against predatory lending.
To understand why the government was so heavy-handed and continues to apply pressure, we need to go back to the 2008 crisis. When the Lehman Brothers filed for bankruptcy on September 15th, the banking world shifted on its axis. Private home loan providers Fannie Mae and Freddie Mac were taken under federal conservatorship.
Lehman may often be cited as the symbol of Wall Street’s fall, but the global financial crisis was caused by the sheer number of institutions involved. Goldman Sachs, JP Morgan Chase, Bank of America—the issues were clearly bigger than one bank or institution and indicated a systemic problem.
The Dodd-Frank Act was introduced to address these issues, and so began a litany of regulatory and compliance requirements in the banking industry. While the Act has been heavily criticized, it remains the cornerstone of what is now an industry that is highly regulated.
The Rise of AI
Over-regulation wasn’t the only thing happening during the Wall Street collapse. Artificial Intelligence (AI) entered the scene and began to significantly disrupt industries and the very nature of business.
Since around 2010, deep learning and neural computing frameworks have enabled machine learning algorithms; in essence, “teaching” a system how to complete a task became possible using pattern recognition from examples rather than writing lines of code for task-specific actions.
As AI became more adept at learning and completing tasks, it was inevitable that it would be employed in as many use cases as possible. With the burgeoning load of compliance, automation in the form of AI was bound to make its way to the regulation sector.
The RegTech Revolution
The combination of AI and Regulation Technology (RegTech) was inevitable. However, despite the compelling use cases and valuable offerings, the financial industry was initially hesitant to accept this technology. Regulation and compliance are high-stakes industries; there’s no room for error, and the requirements are complex.
To demonstrate the viability of their solutions, RegTech companies sought out investors to help realize their products through capital injections for development. This fast-growing industry had just 149 deals in 2015 with a total value of $1.1 billion, and by 2019, these figures soared to 317 deals totaling $8.5 billion, according to RegTech Analyst.
With healthy seed investment, RegTech solutions were able to move quickly from the innovation phase to pilot testing. With real-world case studies and testimonials, startups could showcase the benefits of their products and solutions.
Brian Clark, the President and Founder of Ascent, said it best when he highlighted that “RegTech is no longer just for early adopters. We’re starting to see the actual, tangible benefits these technologies can provide.”
Benefits of RegTech
For banks, the benefits of RegTech are substantial:
Improved efficiency: Complying with compliance requirements is difficult without technology. RegTech solutions can process high volumes of data much faster, extracting pertinent instructions and information from legal documents.
Increased accuracy: RegTech solutions put an end to manual and siloed processes, which often leave room for gaps in the compliance process. Banks can allocate their time more effectively to high-value tasks with automated collection, analysis, and document processing. RegTech reduces the margin of human error and allows for a seamless compliance process.
Enhanced internal cohesion: By using RegTech solutions, businesses can dismantle silos and improve collaborative work processes where compliance is concerned. With greater oversight and insight into different departments, business units can share information seamlessly, promoting a healthy compliance culture.
Understanding the RegTech Universe
RegTech is still relatively new but is growing alongside the industry’s compliance requirements. With improvements in AI and the growing options for tech stacks, the benefits RegTech offers grow with each new iteration.
Despite RegTech’s simplicity, gaining an overview of the industry and the various verticals can be challenging. Here’s how to decide what type of RegTech is best suited to your banking compliance needs:
Four RegTech Categories
Regulatory Monitoring — “Content“
This type of RegTech tool provides a resource center for regulatory content. Users can access summarized versions of the latest regulations and associated policies on one platform. These tools make researching and finding sources on specific requirements easier, with the latest updates included.
Regulatory Obligations — “Knowledge“
Some RegTech tools focus on providing regulatory knowledge. Taking a step above a resource library, these tools analyze the text and extract the compliance requirements.
Compliance Management — “Containers“
RegTech solutions integrating with Governance, Risk, and Compliance platforms are called containers because they house a bank’s entire regulatory database. With integrations into CRM tools, they can additionally track and manage the entire compliance lifecycle.
Execution of Compliance — “Point Solutions“
Banks looking for a comprehensive solution might consider a point solution when selecting a RegTech tool. These tools assist in completing a task in accordance with regulatory requirements or assessing compliance with “an obligation or control.”
Concluding Thoughts
Regulatory Technology, or RegTech, is a relatively new industry that promises the financial sector a seamless process for complying with requirements. Following the collapse of Wall Street in 2008, the industry has dealt with overregulation, and many institutions have struggled to remain compliant in a sea of regulation.
RegTech offers a number of benefits to banks regarding compliance. The technology reduces the margin of human error, improves internal cohesion, and creates a seamless process. This is especially useful considering the high stakes of non-compliance and the sheer volume of documentation that needs to be processed.
With four broad categories catering to a wide array of compliance needs, RegTech is a much-needed solution to a major issue in the financial industry.
