Verne Global

Finance | Tech Trends |

10 April 2018

Regtech promises a future with agile compliance and smarter regulation

Written by Shane Richmond (Guest)

Shane Richmond is a freelance technology writer and former Technology Editor of The Daily Telegraph. You can follow him at @shanerichmond

The digital technology era has brought us adtech, fintech, fittech, medtech and many more buzzwords. A new one has grown in popularity over the last year or so: Regtech.

This portmanteau word, first coined by the Financial Conduct Authority in the UK in 2015, is a blend of 'regulatory technology' and refers to, in the words of Investopedia, "companies that use technology to help businesses comply with regulations efficiently and inexpensively".

Some companies in this space, such as Suade, help financial services companies analyse their own offerings and ensure that they comply with shifting regulations. Others, such as Sybenetix, which monitors financial institutions for suspicious or unusual behaviour and was bought by Nasdaq in July 2017, could be used by companies or regulators themselves.

Such technology is undoubtedly needed. It is estimated that most companies spend between 10% and 20% of their operational budgets on compliance. The Thomson Reuters Cost of Compliance 2017 Report , which surveyed almost 900 financial services compliance professionals worldwide, found that over half of firms expected their total compliance budget to increase slightly or significantly in the following 12 months. Two-fifths (42%) of respondents expected their compliance team to grow in 2017.

This growing burden is in large part due to the financial crash of 2008 and a series of scandals within financial services that have been exposed since then. For example, in January 2018 the European Union introduced MiFID II, the revision of its Markets in Financial Instruments Directive, as part of a bid to strengthen protection for investors.

Meanwhile, the digital era has increased the ease with which data can be collected, stored and, in some cases, abused - witness the accusations around British firm Cambridge Analytica and its use of Facebook data. Regulators have been attempting to gain some oversight in this area too, with measures such as the EU's General Data Protection Regulation (GDPR), which comes into force in May 2018.

There are 800 regulators worldwide so these regulations and many others put businesses under considerable pressure. What's more, the time spent is often unproductive because much of the time the company discovers that it is compliant and doesn't need to act.

Part of the reason Regtech has come along now is that there is plenty of demand. Another key reason is the progress made in digital transformation, meaning that more businesses now have their key data stored in electronic formats. The final piece of the puzzle is the improvements in machine learning and artificial intelligence that make it possible for computers to take a company's data sets, quickly compare them to regulations and decide whether any action is needed.

It's a fast and agile process that offers a 'one-to-many' solution, where one control can be assessed for its ability to satisfy several regulations. At its current level, the technology is mostly being used to automate mundane tasks but in the long term it promises better decision-making, which will mean it can be used to drive real change, rather than simply speed things up.

The benefits to businesses are clear: resources can be freed-up for more useful tasks. Instead of compliance experts having to check everything in case there is a risk, they will instead only have to check exceptions. In turn, that will mean the company can reduce its risks and be much more confident about the level of risk it faces.

Since many of these applications are cloud services, businesses will have even more flexibility. They can draw on this compute intensive process without having to build the tools themselves, they pay only for what they use and will be able to scale-up and scale-down the resources they draw on, depending on how much there is to do. It's much harder for a business to do that with its own compliance team. And all of this can be done in a secure environment.

Finally, the ability to assess so much data and so many regulations in such a short space of time might well lead to better regulation. With better information on how companies are behaving, where they are in breach and which regulations they are breaching, regulators will be able to fine-tune their legislation to be both more effective and less burdensome.

Regtech promises a future with not only less time spent on compliance but also smarter regulation in the first place.

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