Regulatory Technology
With the acceleration in digitisation becoming a staple part of all investment themes, we are beginning to witness increased burden on the risk and compliance functions – especially in the financial services industry. Moreover, these companies are not only expected to swiftly adapt to these pressures, but also do it in a cost-effective and secure manner. Given these factors, we now see RegTech (Regulatory Technology) companies gaining prominence in the eyes of investors as they are viewed as essential to the core operations of banks and other regulated entities.
What is RegTech?
Before we delve deeper into the solutions provided by RegTech companies, we must first arrive at the scope we use to define them. Coined by the UK’s Financial Conduct Authority (FCA) in 2015, they described it as “A subset of fintech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.” Essentially, RegTech is the label given to any technology which helps financial services providers manage regulatory processes.
Growth of Regulation
Depending on the need of the hour, different regulators bring in variety of regulations which have some overlapping aspects. Taking an example; There are regulations relating to Credit Information Companies in India which are approved by/registered with Reserve Bank of India under the Credit Information Companies (Regulation) Act 2005 [CICRA]. There are multiple fintechs in India providing credit underwriting support to lenders including NBFCs/Banks, where they extract data from multiple sources, collate, compile, and do some analytics and make them available for lenders to take decisions. Are these fintechs then falling within the realm of CICRA?
India unveiled the Account Aggregator (AA) network, a financial data-sharing system that could revolutionize investing and credit, giving millions of consumers greater access and control over their financial records and expanding the potential pool of customers for lenders and fintech companies. Account Aggregator empowers the individual with control over their personal financial data, which otherwise remains in silos. Here again, you would see multiple fintechs engaged in some form of data extraction at the consent of his client from multiple sources, collate them and present to lenders for credit underwriting. Are these fintechs come under the framework of Account Aggregators or do they have to register with RBI as NBFC-AA as per regulations? There are no clear and direct answers.
There is indeed a plethora of examples – like payment companies operating in India – some are payment gateways, some are payment aggregators, some are wallet companies, and some are pure tech cos giving backbone to these operators. Whether all are required to be brought under Payments and settlements Act – here again, there would be no clear and direct answers unless every aspect of the business is analysed and compared with the scope of regulations in detail.
Regulation Tech therefore helps articulate clear distinction in application of multiple regulations and help the companies to handle compliance easily where multiple regulations bordering on breach on some aspect or the other confront them.
Technologies Utilised
As we noted earlier, the current legacy solutions are unfit to tackle the constantly evolving demands of regulatory compliance. Further to the growingcomplexity of regulation, we also note that the increasing costs associated with non-compliance have made investing in RegTech products financially viable for both regulatee as well as RegTech companies. This is indeed over and above the financial risk of losing customers due to slower, error prone processes. As per a PWC report, more than 10 to 15% of the workforce is dedicated towards regulatory compliance, with >500% change in the volume of regulatory updates over the past decade.
Thus, given the financial incentive to ensure consistent compliance, RegTech firms can invest in cutting edge technology to bring about digital transformation to the world of regulatory reporting. These include:
- Data Mining and analytics – Simplify data management and aid in providing real time updates for analytics
- Artificial intelligence and machine learning – Play an integral part as they allow for faster decision making without need for human intervention
- Blockchain – Role of distributed ledgers continues to expand as they can provide validation for KYC obligations as well as ensure traceability of transactions to serve as an anti-money laundering tool
Use Cases
Given above mentioned advances in this segment, RegTech company solutions are becoming more robust and cover a widening range of use cases, as described below:
- Regulatory Reporting – Enables automate data distribution and regulatory reporting through big data analytics and real time reporting
- Compliance – Real time monitoring of current state of compliance; as well as monitor changes and evolutions of regulations (per Deloitte estimates, there are around 220 regulatory revisions each day)
- Risk Management – Detecting compliance and regulatory risks, assess risk exposure and anticipate future threats
- Identity Management – Facilitating counterparty due diligence and KYC procedures to promote anti-fraud screening and detection
Future of RegTech
While RegTech companies have undoubtedly benefited from Covid-19 led acceleration towards digitisation, their continues to be areas of improvement and growth within the ecosystem. We can expect to see these technologies being utilised in sectors beyond financial services and extend into areas such as ESG reporting. To note, areas such as energy and healthcare, with strict reporting requirements, are prime candidates for future disruption by RegTech companies.
Additionally, as these technologies continue to grow in importance, we will most likely see a more detailed breakdown in ‘RegTech taxonomy’ to allow for clear demarcation and identification of fields which make up the ecosystem. A universally agreed taxonomy can help stakeholders to ‘speak the same language’ and refer to the same concepts, creating a foundation for further research into the field.
Finally, we also expect significant advancement through merger between regulatory technology and business processes. As these solutions will go from a ‘nice to have’ to a necessity, we will witness RegTech becoming a part of the fabric of a company – providing holistic end to end solutions.
Overall, RegTech is yet another segment which stands at the confluence of multiple driving factors. The robust technologies available to address the ever-growing compliance risks will continue to drive the market, making it attractive for investors, business partners and regulators alike.