Regulatory Technology Is A New Remedy For Emerging Regulations

How to avoid costly reforms and unnecessary decisions


2016 has been a year of turbulence in the financial sector, with costly regulations impacting financial institutions (FIs) across the world. Fintech continues to capture the interest of investors, entrepreneurs, and banking professionals, partly due to the often unclear regulations surrounding them. Fintech covers many areas including banking operations, lending, and payments, but recently it has also introduced a subset called regulatory technology (Regtech). The idea of this is to help FIs stay up to date with regulations, ease regulatory processes, and adapt business strategies and financial operations.

According to Deloitte, this year regulatory initiatives will be focused on ensuring operational continuity, driving more interventions from authorities in the financial sector, particularly for banks. There are also regulatory proposals around risk exposure, relating to the held capital required and the processes needed to calculate the amounts needed. These, combined with several other regulations in the pipeline, mean it is going to be a challenging year for established financial companies.

Many firms and FIs experience the same problems regarding increased compliance costs. According to The Institute of International Finance (IFF), JPMorgan Chase had to add 13,000 new employees to support regulatory compliance and control efforts at a cost of $2 billion, with an additional $600 million spent on regulatory and control technology. Considering that JPMorgan is not the only company spending big for the sake of regulations, many FIs are moving towards Regtech implementation to reduce costs and reduce the potential for human error.

So what does regulatory technology include? Regtech applications cover data aggregation, risk modeling, scenario analysis and financial forecasting, monitoring payment transactions, and identification of clients. Essentially, Regtech is a series of processes with data as a critical component.

This technology makes problem-solving more efficient and allows banks and firms to avoid costly reforms and unnecessary headcount. The technology also provides a deeper understanding of essential regulations, so companies can avoid falling foul of the laws simply because they don’t know what they are.

Compliance and regulation often sound intimidating, creating a barrier for entry in the market, but with Regtech capable of simplifying compliance this may no longer be the case. Regtech is not widely used yet, but demand for it is growing rapidly. When regulatory applications are fully introduced to the market, the impact is likely to be significant.

The topic of Regtech implementation was widely discussed during the IIF's spring meeting in Madrid. The CEOs of European banks, including ING and BBVA, pointed out that Regtech initiatives have helped to considerably reduce the time to market for several new products.

Since there is significant demand for Regtech and there are limited numbers of companies in the field, it creates opportunities for entrepreneurs to bring new propositions to market and become dominant players in the area.

Dealing with financial regulations can be painful, but it is creating new opportunities in the space. We have seen exciting companies like Suade (a regulation service platform), OpenGamma (risk architecture for traders), and Starling (a service that enables companies to apply advanced analytics to guide their culture and employee engagement) already becoming successful because of it. As long as there are regulatory issues that require a solution, there will always be a demand for new technology and services that help to resolve it, and these companies may be the leading edge of the wave. 


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