Compliance should be a core part of any business. And whether you outsource this function, or have your own team, your compliance team is responsible for making sure you conduct your business on the right side of all relevant regulations.

Definition of RegTech from the FCA:
RegTech applies to new technologies developed to help overcome regulatory challenges in financial services.

In fact, since the 2009 Financial Crisis, even more focus has shifted onto compliance. The regulatory landscape has moved up a gear and requires more attention. New regimes mean that requirements for firms are now stricter than ever. And it’s a moving target, particularly in the UK.

The past decade has seen a sea change in financial regulations globally.

The Dodd-Frank Act in the US
was introduced to end the idea that a firm could be ‘too big to fail’ and to protect consumers through greater transparency and greater powers to regulators.

The Markets in Financial Instruments Directive (MiFID) II in Europe
aims to make financial markets more efficient, resilient, and transparent as well as strengthen investor protection.

Since Brexit, questions remain on whether the UK will ‘gold plate’ EU standards and work in parallel with their European peers or start diverging to a new regime altogether.

Regardless of where we’re heading, it’s crucial that firms keep up with regulatory change. Getting it wrong means the risk of fines, censures, or worst case, entire businesses. So, what tools exist to help companies comply with the expanding world of regulation?

Critical technologies for the world of compliance

As the FinTech boom continues, it’s hardly surprising to see technology enter the world of compliance, giving companies the tools they need to meet their regulatory responsibilities. Say hello to ‘RegTech’. From blockchain solutions to APIs, text recognition to cloud computing, RegTech allows companies to process vast amounts of data and to scale their compliance efforts in a way that simply isn’t possible without technology. And with pinpoint accuracy that doesn’t allow anything to fall through the cracks.

Essentially, there are four main benefits to users of RegTech:

  • Simplified processes
  • Greater flexibility
  • Earlier identification of any issues
  • Lower costs

What are some examples of RegTech being put to good use?

1) ‘Know Your Customer’ (KYC) and Anti-Money Laundering (AML) screening

AML regulations are in place to help prevent financial crime. This means you must take steps to know who your customers are, and to assess the nature of your relationship with them. And while a customer might have been deemed ‘low risk’ at the outset, you need to be aware if anything changes.

What if they become a ‘politically exposed person (PEP)’? What if they’re based in a country that suddenly moves onto a sanction list? Monitoring this kind of information manually is not only time-consuming, but high risk. RegTech can be used to instantly scan all your KYC data against real-time PEP and sanction lists to highlight any customers of concern.

2) Transaction monitoring

As a company, you are responsible for detecting and preventing any suspicious transactions to the authorities. But as your customer base expands and the number of transactions grows, this becomes an increasingly impossible task to manage manually. Especially if you’re operating in multiple jurisdictions, each with slightly different sets of rules. RegTech software can help by screening all transactions and only flagging those which breach the rules for compliance to review. What’s more, some RegTech can use machine learning to adapt alerts as criminal behaviour evolves, meaning users stay one step ahead without any need to manually adjust triggers and limits.

3) Record keeping

Conducting checks on your customers and their transactions isn’t enough. You need to store records of these checks in an appropriate way and be able to pull up these records by a regulator immediately if required.

RegTech can get your electronic records to prepare for audit, protect sensitive data and make sure information is retained for the correct time horizon.

4) Reporting requirements

Lack of good quality data is often the key issue that RegTech looks to solve. This is particularly true when it comes to reporting requirements, and something that regulators themselves are calling on RegTech to address.

For example, in the UK, the Financial Conduct Authority (FCA) has called for technology to achieve smarter regulatory reporting. Essentially, they want to see more accurate and consistent reporting, which would be made possible by greater integration from companies.

And as the ESG sector continues to grow, RegTech will be essential for driving transparency and consistency in how firms report their ESG impact, making it easier for investors and customers to compare firms.

5) Electronic signatures

During the COVID pandemic, many companies who were dependent on physical signatures found themselves facing big challenges. Compliance teams had traditionally requested wet signatures as confirmation of a signatory’s identity as much as their consent, but the growth of electronic signatures changed that. In fact, many began to realise the benefits of electronic signatures over the more traditional method of physical signing. The speed at which a contract could be executed, the automated workflow, the high level of data security – and that’s not to mention the huge environmental impact. This has been a huge benefit for many different industries – from lawyers who no longer need all witnesses in one room, to finance professionals who can execute deals much faster with investors.

What does the future of RegTech look like?

The use of technology to streamline compliance is evolving at a rapid pace. Data from FinTech Global suggests that 2020 was a record year for RegTech companies, in terms of both funding and the number of deals.

And regulators themselves have a vital role to play in the development of this market. To date in the UK, one of the biggest advocates of RegTech is the FCA, who has been actively promoting the adoption of RegTech since the Call for Input in 2015. It’s recent paper titled ‘The future of RegTech – what do firms really want?’ is an interesting insight into how the sector can capitalise on current demand. This research has identified that RegTech firms need to better communicate how their solutions address real world problems, especially with smaller firms.

While RegTech is booming for financial services, there are enormous opportunities outside of this sector. Other heavily regulated industries such as healthcare, telecommunications and energy could be next to benefit from the RegTech revolution.

Further reading

Deloitte has put together a useful summary of some of the RegTech that’s currently available, and what it offers users, which you can download here.