An Insight into RegTech (Regulatory Technology)

Ashish M. Shaji

09 Jun, 2020

What is Regulatory Technology?

Regulatory Technology, also called RegTech, is a form of new technology that, with the help of information technology, enhances the regulatory processes. It uses technology to improve the way businesses manage regulatory compliances. It has the main application in the financial sector and is considered as a subcategory under FinTech. RegTech emphasizes particularly on regulatory monitoring, reporting, and compliance, thereby benefiting the finance industry.

What are the main objectives of Regulatory Technology (RegTech)?

The main objectives of RegTech are as follows-

• Transparency enhancement;
• To enhance consistency;
• Standardize regulatory processes;
• Delivering sound interpretations of ambiguous regulations; and
• Providing high levels of quality at a lower cost.

Potentials of Regulatory Technology (RegTech)

Till now, RegTech has been focussing on digitizing manual reporting and compliance processes. It provides considerable cost savings to the financial services industry and regulators. However, it may be noted that in 2016 an academic paper mentioned that the potential of RegTech is much more than what we have seen till now.

It further stated that RegTech has the potential to facilitate real-time and proportionate regulatory regime that detects and addresses risks, thereby providing an efficient system of regulatory compliance. Such effective regulatory technology helps in dealing with the risks quickly in compliance with national and international regulations.

The report further states that RegTech’s transformative potential can be captured entirely only by a new and different regulatory framework. The growth in FinTech, changes in the emerging markets, and the proactive stance of the regulators all combined together can facilitate a transition from one regulatory model to the other.

Characteristics of Regulatory Technology (RegTech)

Some of the key characteristic features of RegTech are as follows-

• Agility

RegTech contains agility as cluttered and intertwined data sets can be separated and organized through ETL technologies (Extract, Transfer, and Load). As RegTech utilizes technologies like cloud computing and machine learning, it can connect with the process quickly.

• Speed

This is one of the main characteristic features of RegTech. It accelerates the process of regulatory compliance. The reports can be configured and generated quickly by RegTech as it works faster than humans.

• Integration

RegTech, in a short time period, gets the solution up and running. Its process has different steps; therefore, it can use a different form of technology. 

• Analytics

RegTech, with the help of analytics tools, intelligently mine existing big data and unlock their true potential like using the same data for numerous purposes. Analytics allows Regulatory Technology to represent information in easy form. It can help in filtering the data, thereby allowing it to show only that which matches your interest. 

How RegTech help financial services?

The list of benefits that RegTech provides financial services is growing day by day.

RegTech’s helps financial services in the following ways:

• Data management solutions;
• Know Your Customer solutions and Anti-Money Laundering solutions;
• Tax management solutions;
• Risk Management solutions;
• Trade monitoring solutions;
• Portfolio Risk Management solutions; and
• Regulatory change management solutions.

Who is involved in the process of Regulatory Technology?

There are three main stakeholders involved in RegTech that play an essential role in the process.

These are as follows:

• Regulators

Regulators are federal regulatory bodies that define the rules and come up with new regulations or update the existing one. The regulations are usually industry specific so that the companies related to the same industry can adopt them.

• RegTech Developers

RegTech Developers are tech people or companies who are involved in building RegTech software. They study the regulations set by the regulators, and then they start working on software building in order to automate the compliance process.

These developers collect the required information and create logic to monitor activity to identify any outlaws. In the process, they are required to adhere to the regulatory standards and understand the needs of the clients.

• RegTech Clients

These clients use the RegTech software, and once it is ready, the clients will look to identify which part of the compliance process does the software takes care of. The software requires manual effort as well, so the clients are supposed to integrate the software into the compliance process.

Understanding the process of Regulatory Technology (RegTech process)

The RegTech process can be divided into four parts-

Now, let’s understand this one by one.

• Signing up customers

There is no use of a business if there is no one to use it; therefore, the first step is to target the audience. This step involves validating and verifying the customer’s information and further ensuring that it is legitimate information. It is considered an onboarding process that plays a massive role in eliminating the chances of threats. Automation of the process requires understanding the needs of the customers and the compliance process of customers.

• Monitoring

The second step is monitoring. When the customer registers  their self , they will have given access to track transactions.  Monitoring is a continuing process where the customer’s activity is monitored. The software checks for any suspicious activity.

For large companies, the generated data may be big, so RegTech usually uses cloud computing and big data to handle data flow. Such data may be either in a structured format or in an unstructured format. Notwithstanding, the data must be converted in a form that the software is designed to work with. 

• Detection

Here machine learning plays its part. When monitoring transactions and customer activities, it is advisable to look for specific predefined patterns. For instance- for detecting money laundering, one must know what are money laundering and its way so that he or she can write detection logic and then use machine learning to discover its pattern and then detect it.

• Reporting

When the regulations are not complied with, then come reporting. Where any suspicious activity is noted, and there is enough evidence to prove a breach, then the regulators must be informed. It is essential because reporting will determine the integrity of the service.

Why is there a need for Regulatory Technology?

The financial service sector has been stuffed with regulations, and with a view to reducing these enormous and increasing burdens of regulatory terms, financial institutions are aiming to move to new technology solutions. In the financial sector, regulatory changes are increasing at a staggering rate around the world, and coping with these regulatory changes imposes high complexity and strict timelines on financial institutions. In the last few years, regulators have advised financial institutions to use modernizations on their businesses. The majority of the organizations have found it tough to deal with regulatory-driven transformations. RegTech overcame this by establishing a solid foundation with the FinTech ecosystem and came up with solutions that are aimed at new and complex regulations, litigation, and regulatory remedy areas tackled by the financial institutions and with a reduction in cost compliance. 

The present legacy solutions employed by the banks are not apt for meeting the requirements implemented by the regulators across the globe. RegTech provides a way for banks to satisfy these requirements without completely overhauling their extant models. RegTech is predicted to be the future of facilitating compliance management and reducing regulatory risks.

Fraud and Risk management- Regulatory Technology

The Risk Management solutions allow automated credit assessments in order to understand optimal exposure and limits. However, collaborating with RegTech can bring cost savings and a high return of capital with all regulatory requirements. RegTech systems in risk management support risk data aggregation for reporting, modeling, capital planning and liquidity, scenario analysis.

RegTech in areas like Know Your Customer (KYC), real-time Anti-money laundering screening, and real-time compliance monitoring were highly adopted by banks. Other areas like cloud computing for data standardization, analytics dashboard, and predictive analytics for risk management, real-time Anti-money laundering, sanctions screening, and compliance monitoring are also generating interests.

Conclusion

Also, read: Covid-19 Impact on Digital Banking in India