Innovation in RegTech for Financial Services
Since the 2008 financial crisis, governments and central banks have introduced a vast array of new regulation for the financial services industry. This has led to the emergence of a new type of FinTech start-up, “RegTech”. RegTech (regulatory technology) refers to either a firm or group of companies that use technology to help businesses comply with regulations efficiently and inexpensively. In practice this can include a wide variety of services, ranging from easing regulatory reporting, to risk management, and communication monitoring and know your customer or client (also known as KYC).
If RegTech is a relatively new phenomenon, why has it had such a rapid emergence in the last few years? There seem to be several key factors that have led to this meteoric rise to relevance:
- The new post-2008 regulations (ie.) MiFID II
- A historic underinvestment in dealing with regulations prior to 2008
- Cost of regulation
- The culture of the big banks
Governments and regulators have been extremely keen to pass new legislation to control the activities of banks. With many financial institutions scrambling to comply with MiFID II by January 2018 as well as GDPR looming. This has led to somewhat of a regulatory spaghetti, with developed markets seeing a 492% increase in regulatory changes between 2008 and 2015.
This has been exacerbated by a historic under-investment during the ‘light touch’ regulatory environment before 2008. Banks tended to hurry to deal with a specific regulation as it came along, rather than overhaul their systems to deal with the longer term regulatory challenges. Compare this to the dreaded MiFID II which has created a near $100bln dollar market for companies serving the gap in front to back office MiFID II compliance.
The third contributor to the rise of RegTech has been expense. Post-crisis fines have exceeded $200 billion, and as such the ongoing cost of regulation and compliance has become an industry-wide concern. On top of this, by some estimates competition with FinTech firms is expected to put $4.7 trillion of revenue at risk. This means that banks are incredibly keen to adopt new technologies to stay ahead of the curve.
And finally, whilst in the past innovation in financial markets was driven by the banks, it is apparent that a culture shift is underway. This has led to a greater level of innovation occurring in FinTech startups and RegTech for financial services with London leading the way in RegTech investment.
The four key reasons outlined above, have led to the perfect storm brewing. The last ten years have provided an excellent environment for new innovators to enter the market to help established financial services institutions deal with regulatory burdens.
The companies that are innovating in RegTech for Financial Services
Onfido – A RegTech start-up founded by three Oxford University graduates that helps banks with client onboarding, anti-money laundering, and KYC. They allow banks to digitally verify people’s identity using machine learning technology, allowing verification to take minutes rather than hours or days.
Credit Benchmark – Also founded in 2012, Credit Benchmark specialises in pooling, aggregating, and anonymising credit risk data from leading global banks. This allows financial institutions to make better risk management and capital allocation decisions.
ipushpull – recently named by Data Management Review as a Top 10 RegTech Startup, offer a cloud service and workflow tools that allow businesses to share data and other information seamlessly, without using email attachments or file sharing. ipushpull helps MiFID II pre-trade transparency around quote dissemination by voice brokers and provide compliance in hours, not months. The company also supports MiFID II research budgeting, allowing users to monitor and track research consumption and optimise budgets.
The changes the market faces and the challenges/opportunities
Whilst the past few years have shown that RegTech has great promise, let’s have a look at what’s going to happen over the next few years. Here are the challenges:
- Scalability – whilst many RegTech solutions may work on a small scale at start-up level, can they be scaled to deal with the issues present in financial services firms with hundreds of thousands of members of staff.
- Integration – will specific RegTech solutions be able to integrate effectively with incumbent’s legacy solutions.
- Compliance buy-in – will compliance departments sign-up to products that might eventually make their line of work redundant?
- Preference for legacy systems – will RegTech start-ups be able to convince incumbents to move away from their legacy systems? Because whilst inefficient and outdated, there may be a preference for the tried and tested.
However, whilst there are undoubtedly challenges, all should be able to be dealt with. Marc Andrews, vice-president at IBM’s Watson Financial Services Solutions states that:
“It [RegTech] has the opportunity to drive a dramatic step change in how organisations are addressing regulatory compliance, and to transform regulatory compliance, both within financial services organisations and in the industry as a whole.”
Such a view is supported with research by Financial Services Roundtable, who stated that global demand for RegTech is projected to reach $118.7 billion by 2020. Accenture expect opportunities for RegTech to provide workflow managing, tracking, and evidencing solutions, envisioning demand for more sophisticated visualisation and reporting capabilities to assist with internal oversight activities.
With the rise in regulations over the previous ten years, added to by a range of other factors, the stage has been set for RegTech to succeed. Whilst there are some challenges that must be dealt with, the future for RegTech is bright.