What Is RegTech?

Regulatory technology, by definition, encapsulates all technology created to help companies in the financial industry to comply with regulations. RegTech solutions focus mostly on anti-money laundering (AML) and know your customer (KYC) regulations.

RegTech solutions are designed with a high level of precision, which is provided by artificial intelligence (AI) and machine learning technology. There are varieties of functions that RegTech solutions cover, such as regulatory change discovery applications, fraud prevention, know your customer (KYC), and risk management.

After the global financial crisis of 2008-09, regulatory changes have surged in volume to about 500 percent. That’s probably why commercial service companies decided to up the number of their compliance staff and also delegated more money to their compliance fund.

RegTech aims to work hand-in-hand with the compliance departments of different financial service companies to generate reports, monitor regulatory changes, reduce the frequency of false non-compliance alerts, monitor risks, and supervise billions of transactions.

For companies, the task of compliance maintenance is too costly to handle. RegTech, seeing an opportunity here, stepped in to make this compulsory requirement cheap by using artificial intelligence (AI) technology. Users of RegTech applications are sure to have access to risk management, financial crime identification, and identity management services. In the end, the entire objective of RegTech is to make compliance as affordable as possible.

History of RegTech

The financial crisis of 2008 cast a lot of strict eyes on the financial industry, bringing about increased regulations to prevent any repeat of such a horrible event in the future. After the crisis was over, more technologies fashioned for the financial industry started to spring up, leading to the establishment of more FinTech companies.

These companies worked to make the integration of customers with the financial industry a seamless one. Yet, the fear of the 2008 financial crisis still lingered, especially among legislators who introduced extreme regulations that ended up hurting firms. These firms reacted by hiring lawyers, consultants, and accountants just to stay afloat.

For instance, U.S. banks have been slammed with fines amounting to $243 billion since 2008. As if that is not enough, companies in the financial industry are made to pay an 8% tax, which covers compliance costs for the multiple regulators and jurisdictions in existence.

Business growth is not exempted from this burden as business expansion comes with a price. For businesses to wade into new regions, they need to be up to date on the regulatory requirements of the region, which leads to companies hiring professional advisors at exorbitant rates.

For big financial institutions, managing legal and regulatory risks can cost up to $10,000 per employee, and in the case of major banks, managing their compliance challenges can be anything from $1 million and above apiece. Therefore, all these legal issues and regulatory measures made regulatory technology a necessity.

Types of RegTech

The coming of RegTech is for one primary purpose, and that is to reduce the cost of maintaining regulatory compliance by simply automating its processes. RegTech comes in different types, and they include:

Regulatory Intelligence. This class of RegTech solutions works to update companies about critical regulatory developments. This is vital because new rules and regulations are continuously added, so the need for your software and staff to be aware of the changes is necessary to meet up with compliance.

Risk Management. Solutions targeted at this helps companies to know about gaps in their business processes as well as regulatory pitfalls. Companies that want to avoid any potential problem with regulatory authorities will find these solutions useful.

Customer Identification and AML/KYC. Solutions in this category help businesses to maintain compliance. AML and KYC laws are essential in the RegTech industry, hence the creation of solutions to handle them.

Transaction Monitoring and Reporting. This RegTech category focuses more on AML solutions to oversee transactions and use AI to identify non-compliant transactions.

RegTech Applications and Companies. The application of RegTech broadly covers the financial services sector. Below is a list of its application in various aspects of the industry:

• Enterprise Risk Management: This category is an extensive one because it addresses risks that can harm the entire company and not just a part of it, like fraud risk. Companies in this category are Fenergo and Argos Risk. Fenergo is a platform that helps companies monitor for fraud and also prices end-to-end regulatory onboarding. Argos Risk helps businesses fight identity fraud and to manage credit risk.
• Blockchain / Bitcoin: Since security is a common issue for regulators and market participants concerning the blockchain technology, RegTech companies have been established in this respect to put to rest all worries. Skry is one of such companies, and it monitors blockchain technology and conducts risk assessments. Another company in this space is Elliptic. It is a database that assembles audit-trails of Bitcoin addresses.
• Portfolio Risk Management: Companies that are in this category make it difficult for financial services companies to fall victim to undue risk. Some of the companies that offer the service are nCino, a software for banks which gives access to a range of portfolio management services. Kyriba is yet another company in this space that provides analytics and reporting via a SaaS treasury management tool.
• Operations Risk Management: This category contains companies that make available software with which financial service organizations can manage their daily operational risks. Companies in this category are Rsam and NetGuardians. Rsam provides software that helps in Governance, Risk, and Compliance (GRC). NetGuardians provides risk management software that aids in management, tracking, and incident identification.
• AML / KYC: Companies in this category help keep financial services firms in line with anti-money laundering (AML) requirements. This makes it difficult for criminals to use banks for money laundering activities. Know Your Customer (KYC) tools are used to confirm the identity of personnel or clients. Here are some companies that provide these services: ComplyAdvantage and Trunomi. ComplyAdvantage possesses a comprehensive database of individuals and organizations. It constantly monitors and responds to information concerning financial crime risk. Trunomi is a platform that stores and protects identification information. Also, when such information is required, they can be gotten from the platform.
• Quantitative Analytics: These companies make use of quantitative and analytic modeling to provide financial services firms with tools for liquidity, credit, and market risks. FINCAD and Ayasdi are companies in this category. While FINCAD is a modeling and valuation software provider, Ayasdi is an artificial intelligence and machine learning analytics tool.
• Trade Monitoring: Here, RegTech companies provide software that can keep a close watch on the activities of employees to ensure that they comply with trade restrictions and also not to conduct unauthorized transactions. Examples of these companies are Droit Fintech and OpenGamma. Droit Fintech is an over-the-counter (OTC) derivative trading platform that helps firms to comply with global regulations. OpenGamma ensures that trading activity does not exceed risk management boundaries.
• Tax Management: The companies in this category use software to conduct record-keeping, collect tax revenue and government filings. Avalara, a web-based company, makes tax collection easier by automating it. Canopy Tax is a SaaS-based platform for tax management.
• Reporting: These companies work with both tools and software to blend reporting and data analytics, automate ad-hoc, and regular reporting and maintain information for future use. They include Certent and Capital Confirmation. Certent is an online-based technology that simplifies financial reporting. Capital Confirmation is a well-protected electronic reporting confirmation service used by auditors.

The Future of RegTech

RegTech adopts the very best among cutting-edge technologies in its service delivery like cloud computing, artificial intelligence, machine learning, and lots more, to make sure that no company has to ever run into problems with regulatory authorities because of compliance. RegTech has been able to screen out the human error factor from compliance processes by making them automated.

Data obtained from an investigation carried out by Juniper Research Shows that the future looks suitable for RegTech. According to expert predictions, in the next five years, investments in RegTech will soar by 48%, an increase from the 2017 record of $10.6 billion to $76.3 billion come 2022.

Summary

No company in the financial services sector can do without RegTech, esp. if they want to operate a profitable venture. Companies sink a lot of money into compliance every year, to the tune of billions of dollars. They spend all that money just to acquire compliance software and staff, but there is a much better alternative now, and that is RegTech.

With RegTech, companies can save more money and at the same time, keep up with the latest in regulatory changes. By so doing, they will be able to know what is required of them and comply accordingly.