What is RegTech? Requirement & Benefits

“Compliance is becoming terrible”

 

“With more regulation, more transformation and more complexity, compliance is getting harder”

 

Financial firms are facing regulatory burden speedily than ever before, amends for non-compliance are becoming more frequent and more severe. Rules and regulations have encountered much transformation in the last decade, and every fraction of minutes, a new regulatory update gets put into action. These challenges have invited regulators to bring and boom a new industry called “RegTech” to help businesses in strengthening every part of the compliance process.

 

RegTech incorporates a wide range of tools and techniques supporting multiple organizations to stay ahead of the curve of regulation and run and elevate business activities in a more convenient manner.

 

In this guide, we are going to discuss the young and expanding RegTech domain and explain what Regtech is,  why it matters along with its multiple benefits and what’s next for RegTech in future. 

 

(Must read: What is FinTech?)

 

 

Understanding RegTech

 

Essentially, RegTech involves a cluster of companies implementing cloud computing technology via software-as-a-service (SaaS) in order to aid businesses to abide by regulations effectively and efficiently at fewer costs. To address complex compliance tasks, financial institutions and regulators extensively employ RegTech.

 

Firstly started by the UK's Financial Conduct Authority (FCA) in 2015, RegTech was stated as “ A subset of FinTech converging on innovative technologies, the term facilitates the implications of regulatory necessities in more efficient and effective ways in comparison to existing means. 

 

RegTech is commonly misinterpreted with FinTech, for simple understanding, FinTech signifies the deployment of innovative technologies and software to offer financial services while RegTech is the implementation of latest technologies to address complex data landscape demanded in the implication of regulatory compliances. 

 

RegTech is redefining the future for financial services. New digitisation technologies are changing the way risk management and regulatory compliance requirements are addressed and delivered. However, for this to happen, collaboration across a number of actors is crucial, particularly across the banks, the regulators, the RegTech firms, and the large consultancies. REGTECH, DIGITAL RISK & COMPLIANCE

 

Requirement of RegTech

 

Being an effective community of tech companies, RegTech addresses multiple challenges generated by technology-driven economy via automation. Digitally conducted processes have advanced data breaches, cyber hacks, money laundering and other deceptive practices.

 

Leveraging the potential of big data and machine learning technology, RegTech is directed to decrease the risks of a compliance department of an organization by presenting data over money laundering activities conducted online, such activities were challenging  to deal with by traditional compliance teams.

 

RegTech tools monitor regular online transactions to recognize any type of issue or irregularity in the digital payments, any outlier transmitted to the financial institutions needs to be analyzed and determined if fraudulent activity is taking place. Financial institutions, pinpointing relevant threats in financial securities at early stages, can reduce risks and costs related to lost money and data breaches.

 

(Related blog: Compliance Testing)
 

In collaboration with financial institutions and regulatory bodies, a bunch of companies under the umbrella of RegTech employ cloud computing and big data as technologies to exchange relevant information. Cloud computing is a cost-effective technology implemented by users to distribute data swiftly and securely with other efficient bodies.

 

For instance, a bank generates a flood of data in a fraction of time that can be compact, extravagant and tedious to examine and interpret. By incorporating complex bank information with the data from earlierly detected regulatory failures, a RegTech organization can assist in order to anticipate potential risks and imperil areas upon which a bank needs to concentrate and thereby reduce bank’s time and finances by formulating required analytics tools for the banks to comply with regulatory bodies. However, banks have additional effective tools to follow rules instructed by financial authorities.  

 

The rise of regulatory technology, or RegTech as it is known, is empowering numerous organizations via giving tools required to conduct efficiency, sustainability and competitiveness for the functioning of regulatory compliances. The innovative voyage has been facilitated with the inclusion of complex regulatory compliance portraits especially in the financial services sector that additionally build the requirement to explore effective approaches to comply. 

 

With ample automation and increasingly expanded regulated industries, huge possibilities are there that RegTech could augment transparency amidst market shareholders and regulators, prompt standardization and aim to bring value to them.

 

(Suggested blog: Types of financial risks)

 

Benefits of RegTech

 

In order to augment transparency and steadiness, RegTech is subjected to conduct compliance practices, audits and risk assessments. The entity supports multiple organizations to meet and sustain the compliance accountability set by regulatory bodies in real-time while diminishing compliance expenses and developing a bond of trust for investors. 

 

For effective financial services, the benefits of RegTech are considerable, they are;

 

• Efficiency growth:

 

A continuous expansion of regulation demands an aid of technology for compliance authorities to function smoothly and hence boosts efficiency and productivity at an incredible pace. 

 

For example, an advanced technology can process a high volume of data swiftly, probe, analyze complete legal and regulatory text and bring out valuable inferences.

 

• Adequate accountability and accuracy: 

 

Manually siloed processes may build a certain hindrance in compliance operations that result in human errors and extended exposure. Thereby, a selection of appropriate technology can reduce such gaps and fortify a streamlined compliance process.

 

• Major internal alignment: 

 

Advanced technologies strengthen business by enabling greater transparency and accountability and thus connect siloed people and processes. This leads to provide useful insights amid vast business commodities and develop a strong thread of compliance.

 

• Reform risk management: 

 

Applying RegTech tools could shield investors from many types of risks such as market abuse, cyber attacks, fraud, unseen events, regulatory and legal risks, etc through supervising systems and notifying personnel regarding suspicious activities.

 

(Also read: What is differential privacy?)

 

Future of RegTech

 

According to the report provided by EY Regulatory Technology (RegTech), RegTech, for future streamlined compliance processes, calls for more automation, standardization and simplified interpretation around every organization and industry, especially dealing in financial services. 

 

As far as financial institutions are concerned to make more products and services, RegTech expands its boundaries which in turn intensifies the strength for new regulations and increases compliance costs. Thereby, in order to reduce such costs, efforts are made and forced organizations to adapt novel and inventive alternatives of current technological capabilities to attain their compliance needs.

 

In addition to this, RegTech holds the back-office function, its proficiency and insights can facilitate the functioning and strategies of the front-office effectively. Along with the financial industry, various organizations across diverse industries are focusing on adoption of RegTech to leverage its solutions for running their business while addressing the requirements of regulation.

 

Collaboration- Propelling RegTech into Future

 

Combinedly, Regulators, RegTech enterprises, professional service organizations and financial institutions will be required to work closely with each other to provide continuous innovation, reduce entire operating costs of compliance and accurately report to regulators. 

 

"Regulators are increasingly upgrading their knowledge and capabilities with RegTech solutions."

 

According to the viewpoint of regulators, RegTech is becoming an enticing preference that can inspect data and monitor the sustainability of economically developed organizations in a real-time scenario. However;

 

• RegTech enterprises need to evolve their technologies exponentially by virtue of innovation and understanding of new regulations. 

• Financial institutions are expected to take into account the short-term vs long-term approaches in order to comprehend regulatory strategies while navigating cost and potential to comply with each regulation.

• Professional service organizations will have to outlook industry insights and provide advisory assistance to both providers and technology consumers for the implementation of new RegTech solutions.

 

(Top reading: Big Data in FinTech - Benefits and Importance)

 

 

Conclusion

 

RegTech employs a number of advanced technologies including Artificial Intelligence, Big data, Cloud Computing, Machine Learning, etc, these cutting edge technologies ensure companies operate effectively and efficiently to meet regulatory requirements and compliance processes. RegTech focuses on minimizing the possibilities of human error through transforming the traditional processes into automated processes.

 

RegTech, at its essence, introduces marvellous opportunities to remodel compliance, for example, by relieving the workforce to handle additional value-adding work, decreasing risks, deriving hidden insights, and thereby rescue organizations' huge amounts. In this blog, we have enhanced the understanding over RegTech thoroughly and learned about its requirements and benefits. We also have discussed the future of RegTech in detail.