Understanding Regulatory Technology – Lessons on Adopting RegTech

Challenges Faced by Finance Companies

The financial services industry has long been replete with regulations. They face several challenges in their day-to-day operations, including the need to meet compliance and regulatory requirements, manage risks, and process data efficiently. Coping with the sheer volume of regulatory changes imposes high complexity and strict timelines on financial companies. These challenges have led to the need for Regulatory technology that helps them address regulatory compliance issues efficiently. The main challenges in the finance industry are listed below –

Regulatory compliance –

Compliance and regulatory requirements are the major challenges faced by financial institutions. The financial industry needs to operate under heavy regulations and submit accurate regulatory reports in a timely manner. In the wake of the global financial crisis, regulatory bodies have become more demanding in their requirements.  Ensuring that every financial transaction is compliant with regulatory standards can be challenging for financial institutes that rely on manual processes. It can be an arduous task for financial institutions to comply with regulations across different jurisdictions. Each of these jurisdictions come with their own set of rules and requirements as well. This is where RegTech solutions like workflow automation come into play. 

Risk Management–

This is another critical challenge for companies in the financial sector. It goes beyond simple compliance with regulations, extending to anticipation of potential risks before they occur and development of strategies to mitigate these risks as they arise. In addition to financial risks like credit and market risks, financial institutions need to manage operational risks. These include cybersecurity threats, fraud detection, and systematic risks that have severe long-term consequences. To minimize their risk exposure, Financial institutes must create a comprehensive risk management framework that will outline how they will detect, monitor, and respond to potential risks. 

Data management –

Efficient data management seems to be an elusive goal for the finance industry. Given the vast amounts of data generated by financial institutions on a daily basis, it becomes increasingly difficult to store and process data securely. Inability to manage data efficiently leads to delays, errors, and compromised decision making. When data is not managed properly, the reliability and accuracy of data is compromised, which leads to non-compliance. 

Tracing the Origins of RegTech – RegTech from FinTech

As financial companies face regulatory compliance challenges that come with expanding business operations and globalization, the need for regulatory technology has become a vital part of its growth strategy. Finance and banking companies can efficiently address compliance issues by leveraging advanced technologies like machine learning, artificial intelligence, and blockchain. 

Over the past few years, financial institutions have partnered with FinTechs to address various challenges that arise from using conventional methods to manage their transactions. During the introductory phase of Fintech, the focus was primarily on customer-facing tasks. Now, companies have started focusing on the back-end aspects too, including regulatory compliance. The 2008 global financial crisis can be considered as the trigger for RegTech. To tackle and overcome this crisis, several new laws and regulations were introduced by regulators. This made it challenging for financial service providers to get a grip on ever-changing regulatory norms. 

So, what is Regtech in Fintech? The increasing need to comply with the ever-increasing burden of regulatory terms and changes has been the driving factor for the rise of RegTech. 

Regulatory Tech can be considered as a niche segment within the FinTech ecosystem that provides solutions that target new and complex regulations, litigations, and regulatory remediation. RegTech offers a seamless way to meet the stringent requirements implemented by regulators across the globe. With RegTech, financial service providers can meet stringent regulatory requirements, without having to overhaul existing models entirely. 

Not just in Financial services, we also need to consider what RegTech is in banking as well. RegTech companies help banks comply with regulations. Banks deal with large volumes of data on a daily basis, making it difficult for internal compliance teams to monitor and verify this data against regulatory norms. This is where RegTech can facilitate accurate and time-effective combing through vast data, saving banks time and money. 

How Does RegTech Work?

Now that we have a fair idea of “what is a Regtech”, let us understand what is a Regtech company, and what does it do? In simple terms, a RegTech company provides regulatory compliance solutions driven by technology. RegTech uses data-driven technologies like machine learning and AI to automate the process of regulatory monitoring. Rather than manually monitoring each transaction against regulatory rules and policies, businesses can automate verification via RegTech. 

A financial services company may use RegTech to monitor all transactions to ensure compliance with AML (anti-money laundering) regulations. The regulatory technology solution incorporates AI algorithms that can detect patterns in transactions that may lean toward suspicious activities or money laundering. 

Using RegTech, businesses can identify potential risks associated with a transaction before they occur. This can alert and protect businesses against losses due to unexpected developments in the market. 

Technologies Supporting RegTech

• Big Data
• Blockchain
• Artificial intelligence
• Cloud Computing
• Virtualization
• API
• Data Mining and Analytics
• Machine Learning

Common applications of RegTech

• Identity and verification management to verify the identities of entities that make contact with the business
• Anti-money laundering by integrating policies and measures that prevent criminal infiltration
• Regulatory compliance that enables businesses to meet Government and Legal policies

Do we Need RegTech?

Staying compliant is one of the toughest challenges faced by companies across the globe. Adhering to financial regulations is mandatory, failing which businesses attract penalties and in some cases lose their license as well. How do you keep non-compliance risks at bay? RegTech is the answer. With more than 600 RegTech companies worldwide, Regulatory technology is poised as the future of facilitating compliance management and minimizing regulatory risks. 

As reliance on digital technology increases, we need to adhere to regulatory norms at all times. Financial companies spend billions of dollars annually just to get compliance checks done right. A 2022 statistic according to Financial News reveals that financial firms spend as much as 10% of their total operating costs on compliance activities. As the number of regulations increases steadily, it is imperative that companies identify potential threats and risks proactively. 

Companies can save huge amounts of money (in the form of penalties and fines) and time (for verification and validation against data) by adopting RegTech. Avoiding compliance issues helps hold the reputation of the firm and improves the productivity and efficiency of the firm by diverting the efforts on compliance verification to productive efforts. By automating the manual effort in regulatory compliance, financial and banking services companies can focus on the value-adding tasks facets of the business, rather than worrying about staying compliant. 

Key Drivers of RegTech Adoption

• 10-15% of the workforce is dedicated to Regulatory Compliance
• Data analysts spend the majority (90%) of their work on gathering data and organizing it rather than analyzing it.
• 492% volume of Regulatory change was recorded between 2008-2015.
• The Global spending on compliance and regulatory verification was 270 billion USD.

Challenges to Adoption of RegTech

Cost barriers that may be a constraint for small businesses

Cybersecurity concerns that arise from the use of AI

The complexity of regulatory requirements overwhelms organizations.

How do Financial Institutions Benefit from RegTech

• Automation and efficiency gains that can streamline business operations.
• Cost savings by reducing the time and resources spent on compliance tasks.
• Improved data analysis capabilities for deeper insights into data and operations.
• Better risk management with an additional layer of protection against missteps.
• Enhanced customer experience by understanding customer data better.
• Improved security and privacy protection while adhering to regulatory requirements.
• Streamlined Know Your Customer (KYC) process for faster verification and onboarding.

Final Thoughts

Regulatory technology is now a widely accepted and utilized solution by Finance and Banking service providers. Businesses that do not want to be left behind in the dynamic finance environment, must embrace RegTech. This blog has explored all aspects of regulatory technology- from what is RegTech to the use cases of regtech. When you choose to automate core business processes, choose a workflow automation solution like Cflow. Cflow can seamlessly integrate with advanced automation platforms like RegTech to give your business the competitive edge. Schedule a free demo to see how.

FAQs

Who is RegTech for?

While banking and finance industries are the primary users of RegTech, Healthcare and crypto currency sector also uses RegTech. 

What is the difference between RegTech and SupTech?

SupTech (supervisor technology) focuses on the supervision of regulated financial services and activities, while RegTech focuses on helping organizations meet their legal requirements. 

What is the difference between RegTech and Fintech?

Fintech is the sector of technology that focuses on digital platforms to automate financial service delivery, while RegTech focuses specifically on compliance and regulatory processes.

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