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05/25/18

Reg Tech – The next wave to disrupt the financial regulatory landscape

300 Billion Regulatory Fines post 2008 crisis (Source: FT research); 492% volume of regulatory change b/w 2008 & 2015 (Source: Thomson Reuters); x45 increase of regulatory fines in 20 large US & EU universal banks b/w 2010 – 2014 (Source: McKinsey); 10 – 15% of total workforce dedicated to governance, risk management, compliance (Source: McKinsey); $70 Billion of annual spend by FI’s on compliance (Source: Medici Insights). The above facts and figures compelling the Banking industry to go back to the whiteboard and rethink on their strategy on how to combat against the increasing levels of complex regulation globally and more challenging regulatory expectations are causing firms significant operational challenges when it comes to understanding, implementing and embedding new regulations and regulatory reform. Already we are witnessing the trend amongst the CIOs of global banks - a shift from traditional approach to a specialist approach of servicing the regulatory compliance as regulators are thriving on use of cutting edge technology to empower financial institutions to act in accordance with regulation effectively and efficiently.

And to capitalize on this emerging trend the industry has already started witnessing and will witness in near future the dominance of a new evolving player named “Reg Tech” (A blend word of 'regulatory technology') in regulatory space who are specialist to enhance transparency as well as consistency and to standardize regulatory processes, to deliver sound interpretations of ambiguous regulations and thus to provide higher levels of quality at lower cost.

The term ‘Regtech’ was coined by UK’s Financial Conduct Authority (FCA) in 2015. “RegTech is a subset of Fintech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.” RegTech solutions will often take the form of software applications, technology-enabled processes, or can be found in completely new and disruptive business models. RegTech is a logical and more recent evolution that complements the broader FinTech space.

Let’s now focus on potential regulatory compliance areas in Banking and Financial Services where Reg Tech solution has a major role to play. Areas like KYC, Customer Credit Scoring, Transaction Monitoring, AML screening, fraud prevention, trade data tracking, compliance risk analysis and many more wherein we have observed in past that in compliance and reporting obligations there are repetitive and mundane compliance tasks involved which leads to human error due to lack of automation which results in industry wide write-offs and costly litigations for failed operations processes the financial institutions has to face. In such situations industry will feel the need and importance of Reg Tech solutions which focuses on realization of near-real time reporting capabilities, calculation and eligibility services, process automation, development of infrastructure to handle increased data volumes, and improvements to data sharing capabilities, all while maintaining security and client confidentiality. The uniqueness of its solution is that it leverages on the existing systems and data for reporting without taking the burden of replacing or enhancing legacy systems .This apart, Reg Tech brings the following benefits to the financial services industry:

  • Greater strategic advantage—from better customer experience, new product development, real-time compliance, and agility
  • Harmonized coordination—through improved functioning across the three lines of defense and enterprise-wide data management as well as embedded ownership of risk management and compliance processes and controls into the first business line
  • Reduced cost—by cutting compliance expense an estimated 30 to 60 percent due to streamlined and simplified operations and reduced headcount spend.

The RegTech industry is currently experiencing phenomenal growth, with huge demand from both traditional banks and FinTech companies—resulting in a level playing field for startups and banks alike. While regulatory innovation may be the catalyst driving innovation in technology and in banking generally, the benefits derived will extend well beyond placating financial watchdogs. Whilst Reg Tech should not be viewed as the solution to all regulatory challenges it certainly provides a significant opportunity to financial institutions and regulators. By harnessing the agile development capability of the RegTech supplier’s technology and its cloud based approach which cuts down the cost significantly, will ease the burden and make regulatory compliance and reporting more achievable – and more cost-effective.

To conclude, we are quite optimistic about adoption of Reg Tech solutions by Banks in coming days/ months/ years and the facts sated below substantiate the aforesaid contention.

  • RegTech market to reach USD 118.7 billion by 2020 (Source: Medici Insights);
  • < 17% of firms have implemented a RegTech solution (Source: CB Insights)
  • RegTechs have raised over $ 6.2B across approximately 680 equity investments since 2013(Source: CB Insights)

This blog is Co-authored by

Sujay Kumar Puttanna, Sr. Consultant, BFSI, Mindtree

Subhasis Bandyopadhyay, General Manager, BFSI, Mindtree

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