In previous blogs, we have discussed the growth of regulatory technology (RegTech) as well as some of the challenges to RegTech adoption, including regulatory uncertainty, lack of uniformity and the difficulty of interpreting a regulator’s true intentions.1 

With large financial institutions spending over USD $1bn a year on regulatory compliance and the average bank spending £40m a year on Know Your Customer (KYC) Compliance,2 the potential market is huge. RegTech firms can have a large impact by bringing new technology solutions to transform cornerstone processes such as contract renegotiation, client notification, shareholder disclosure, trade capture and transaction reporting eligibility. The ability for firms to implement adaptable and versatile software to the everchanging regulatory landscape is key to cutting costs. RegTech firms like FundApp Ltd. provide exactly that, it monitors data trends and warns the user when position limits are nearing breach, or when legal rules have changed. Firms like Financial Samurai, Inc use artificial intelligence and machine learning to spot market anomalies and patterns in real time and Percentile Limited provide solutions across different regulations (e.g. Stress Testing, Basel III, BCBS 239 & Fundamental Review of the Trading Book).

One of the most supportive initiatives to the adoption of RegTech in the UK is the Financial Conduct Authority’s (FCA) Project Innovate. Project Innovate was commissioned to collect industry responses to understand how the FCA could play a role in better supporting and facilitating the adoption of RegTech. We have seen that RegTech solutions are likely to leverage the various existing technology solutions (open APIs, analytics, risk and compliance monitoring) and platforms that have been the foundation of financial technology (FinTech) – but there is more to come. Indeed, in the July 2016 FCA response to Project Innovate, there was a greater call for distributive ledger technology, biometrics, cloud computing, and a more interactive FCA handbook.The concept of a regulatory sandbox would allow RegTech firms to test their proof of concepts in a realistic way.

RegTech firms also bring a broader benefit: allowing new models of interaction that favor all market participants, not just the larger players, and contributing to more transparent, and efficient markets. In our next blog, we will look at how firms can increase the effectiveness and lower the cost of RegTech by moving to a shared services model.

References:

1. “Market grows for ‘regtech’, or AI for regulation,” Financial Times, October 14, 2016. Access at: https://www.ft.com/content/fd80ac50-7383-11e6-bf48-b372cdb1043a.

2. “Market grows for ‘regtech’, or AI for regulation,” Financial Times, October 14, 2016. Access at: https://www.ft.com/content/fd80ac50-7383-11e6-bf48-b372cdb1043a. “The spiraling costs of KYC for banks and how FinTech can help,” June 6, 2016. Access at: http://www.itproportal.com/2016/06/06/the-spiralling-costs-of-kyc-for-banks-and-how-fintech-can-help/.

3. “Call for input on supporting the development and adopters of RegTech,” Financial Conduct Authority, July 2016. Access at: https://www.fca.org.uk/publication/feedback/fs-16-04.pdf.

 

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