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RegTech: The Only Tool you Need for Improving Compliance

Ashesh Anand
Feb 07, 2023

RegTech aims to change the regulatory landscape by offering technologically cutting-edge answers to the financial sector's ever-increasing compliance obligations.

Financial institutions (FIs) and FinTechs have collaborated on a number of business-related projects during the past few years. While customer-facing parts received the majority of attention, businesses have recently begun paying attention to back-end elements as well.

RegTech has emerged as a significant subset within the FinTech ecosystem as a result of intense pressure from regulators on overall data compliance and control. Possible FI-FinTech cooperation to exploit intriguing use cases in the upcoming years.

What is RegTech?

RegTech can be defined as the "application of various new technological solutions that assist highly regulated industry stakeholders, including regulators, in setting, enacting, and meeting regulatory governance, reporting, compliance, and risk management obligations" in the new report, "Regulatory Technology for the 21st Century," published in collaboration with the World Economic Forum's Global Future Council on Agile Governance.

RegTech can assist in reducing risk, enhancing results, and cutting costs for both the regulator and the highly regulated. It speeds up "the dots" connections and automates work. Additionally, it may convert intricate regulations into code. Both the regulated and the regulator can work more productively and cooperatively by using technology responsibly, such as cloud, blockchain, and AI, to enhance the ability of compliance teams.

For those who are regulated, it improves compliance while providing agility to foresee and quickly adapt to new regulatory requirements. More openness and agility in altering regulations to quickly address emerging hazards are made possible for the regulator. The iterative and user-centered regulation design replaces the "set-and-forget" aspect of the relationship. RegTech products come in a range of forms and dimensions. Business solutions, as opposed to single-rule solutions, can be created to offer a real-time 360-degree picture of compliance and risk.

Compliance officers are aware that regulations are not always clear-cut. Financial regulatory authorities give institutions the freedom to create risk and compliance management plans that are suitable for their complexity and scale. There is no one solution that works for everyone.

The best RegTech solutions combine automated, cloud-based technologies with the know-how and assistance of regulatory experts with extensive experience deciphering regulatory complexities. In order to increase productivity, robust RegTech solutions take a holistic approach, recognizing and evaluating how various types of risk interact across the entire organization. Additionally, they help an institution better understand regulatory challenges, enabling it to focus resources on the most important issues rather than taking a shotgun approach.

Also Read | Compliance Testing - Everything you need to know

Brief History of RegTech:

An increase in financial sector regulation was brought about by the financial crisis of 2008. The financial industry saw an increase in the disruptive application of technology as well. The number of fintech businesses that develop technology-driven products to improve the consumer experience and interaction with financial institutions has increased as a result of technological advancements.

Concerns from regulatory agencies advocating for stricter rules on data privacy usage and dissemination have arisen as a result of the reliance on customer data for the creation of digital products. The demand for regulatory technology was sparked by the combination of increased legal and regulatory requirements with a more technologically dependent industry.

Regtech firm funding arrangements have slowed as of mid-2018 due to deregulation in the US, as evidenced by the repeal of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) regulations, while the cost of compliance should continue to drive the trend toward increased automation.

Need for RegTech:

There have always been many rules in the financial services industry. Financial institutions are beginning to look to innovative technological solutions in an effort to lessen the immense and continuously growing weight of these legal requirements.

Financial industry regulations are changing at an astounding rate all across the world. Financial institutions are required to meet strict deadlines and high levels of complexity in order to deal with the sheer volume of new regulatory changes. Regulators have encouraged financial institutions to modernize their companies on numerous occasions during the past ten years, but many of the organizations have had difficulty with these regulatory-driven changes.

In order to overcome this and develop solutions aimed at new and complex regulations, litigation, and regulatory remediation areas faced by financial institutions (FI), as well as an overall reduction in cost compliance, regulatory technology (RegTech) established a strong foundation within the FinTech ecosystem. More than 1600 enterprises globally offer a range of services and solutions to help other companies with their compliance requirements.

The majority of these businesses support compliance with laws including PSD2, MiFID II, 4MLD, and GDRP. Additionally, the majority of these RegTech solutions can be used via open APIs and SaaS business models.

Banks' current legacy systems are ill-suited to fulfill the increasingly strict criteria put in place by regulators worldwide. Banks may easily comply with these standards thanks to regtech, which eliminates the need to rework their current business structures completely. RegTech is positioned to facilitate compliance management and reduce regulatory risks in the future.

Also Read | What is SOC 2 Compliance and its Principle?

What does this imply for those who make policy?

Trust should be built up by regulators and those being governed. Government officials should bring together academia and business, including technology and subject matter experts, to better understand how technology may be appropriately included in reporting, auditing, and compliance management procedures.

To hasten the use of regulatory technology, governments should research the best practices in tech ethics being applied to them and compile a report on how the advantages of digitization accrue beyond compliance.

Regulators should adopt agile governance, a novel, user-focused approach to regulatory technology. According to the paper, regulatory sandboxes and pilot programs can assist regulators in better-selecting solutions that will be fair, accountable, transparent, resilient, and secure from the start by educating them on various approaches to these technologies, particularly AI.

Humans should stay at the core of any RegTech regulations, keeping in mind that the technology's goal is to improve the skills of both the regulator and the regulated.

Open standards-based solutions that can enable enterprise-wide software interoperability should be encouraged through procurement strategies. Siloed, exclusive RegTech solutions could not be as cost-effective as refocusing resources on innovation rather than compliance. Any regulatory guidance in this area should therefore acknowledge and support open technologies.

Also Read | Introduction to Insurance Regulatory and Development Authority (IRDA)

What is Regtech and what are its features?

Benefits of RegTech:

Regulation and compliance technology provides businesses with a number of definite advantages due to its capacity to process massive volumes of data rapidly and properly.

Greater effectiveness: Rules aren't set in stone. New laws are passed daily, and existing laws are amended. It takes a lot of work to manually stay on top of this shifting regulatory environment. The correct technologies can automatically scan new legal requirements in real-time, process them, and then apply them to the particular structure of the organization. Financial firms can thereby effectively respond to new regulatory requirements.

Increased accuracy: Human error can occur with manual processes. RegTech is much more precise when used correctly. Companies can achieve more simplified and error-free reporting by integrating regulatory technologies.

Better risk management: Regulation tools not only help ensure compliance, but they can also identify and help mitigate risks like fraud, cyberattacks, and other shady activities. This enables businesses to react as quickly as security and legal issues arise.

Enhanced trust: At the end of the day, client trust is what determines a company's success. The proper RegTech implementation can promote this feeling of trust. Using RegTech shows a sincere desire to follow rules and implement the appropriate internal procedures to safeguard consumer data and assets.

Internal coordination: Businesses frequently function in silos, with each department having its own procedures and methods for reporting. By acting as a single source of "truth" and ensuring that everyone is working toward the same objective, company-wide RegTech solutions aid in bridging these gaps.

Long-term financial savings: Starting a RegTech business may seem expensive. But over time, it aids financial institutions in making savings. Once they are up and running, these implementations can release internal resources, enhance output quality, and lower the possibility of paying penalties for non-compliance.

Also Read | What is Fintech? Examples and Applications

How is RegTech different from FinTech?

RegTech, short for regulatory technology, refers to the use of technology to streamline and automate regulatory compliance processes in the financial industry. RegTech solutions can help financial institutions manage and comply with complex regulations and requirements, such as anti-money laundering laws and know-your-customer (KYC) requirements. These solutions can include a wide range of technologies, such as artificial intelligence (AI) and machine learning algorithms, big data analytics, and blockchain.

One key benefit of RegTech is that it can help financial institutions reduce the time and resources required for compliance. For example, an AI-based RegTech solution might be able to analyze large amounts of data to identify potential money laundering activity, allowing financial institutions to quickly flag and investigate suspicious transactions. This can help reduce the risk of non-compliance and potential fines, while also freeing up resources that can be used for other tasks.

Another advantage of RegTech is that it can help financial institutions stay up-to-date with changing regulations. Many RegTech solutions are designed to automatically track and adapt to new regulations, allowing financial institutions to quickly and easily comply with new requirements. This can help reduce the risk of non-compliance and ensure that financial institutions are operating in a compliant manner.

FinTech, short for financial technology, refers to the use of technology to improve and innovate financial services and processes. FinTech solutions can include everything from mobile payment apps to online lending platforms, and they can be used by consumers, businesses, and financial institutions.

One key advantage of FinTech is that it can make financial services more accessible and convenient for consumers and businesses. For example, mobile payment apps allow people to make transactions using their smartphones, while online lending platforms allow businesses to quickly and easily apply for loans. This can help increase financial inclusion and reduce barriers to accessing financial services.

Another benefit of FinTech is that it can make financial services more efficient and cost-effective. Many FinTech solutions are designed to automate and streamline financial processes, such as payments and lending, which can reduce the time and resources required to complete transactions. This can help lower costs for both consumers and financial institutions, making financial services more affordable and accessible.

While both RegTech and FinTech involve the use of technology in the financial industry, they are focused on different aspects. RegTech is primarily concerned with helping financial institutions comply with regulations, while FinTech is focused on improving financial services and processes. However, there is some overlap between the two, as many FinTech solutions also have regulatory implications and may require compliance with various regulations.

For example, an online lending platform might be considered a FinTech solution, but it would also be subject to various regulations related to consumer lending. In this case, the platform might use RegTech solutions to automate and streamline the compliance process, making it easier to comply with regulations while also improving the efficiency and convenience of the lending process.

In conclusion, RegTech and FinTech are both important trends in the financial industry that are driving innovation and improving financial services and processes. While they are focused on different aspects of the financial industry, they often intersect and can be used together to help financial institutions navigate complex regulations and provide better financial services to consumers and businesses.

Also Read | A Complete Guide on FinTech App Development

End Note: Future of RegTech

RegTech ensures that businesses are more successful in achieving regulatory compliance by utilizing a variety of cutting-edge technologies, including artificial intelligence, big data, cloud computing, and machine learning, to mention a few. By automating the processes, regtech has reduced the possibility of human error.

According to a Juniper Research analysis, spending on RegTech is predicted to increase by an average of 48% per year over the next five years, from $10.6 billion in 2017 to $76.3 billion in 2022. According to a Juniper Research estimate, the market will grow from $10.6 billion in 2017 to $76.3 billion in 2022. Find out how EQS Group can help your business comply with regulatory obligations.

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RegTech: The Only Tool you Need for Improving Compliance

What is RegTech?

Brief History of RegTech:

Need for RegTech:

What does this imply for those who make policy?

Benefits of RegTech:

How is RegTech different from FinTech?

End Note: Future of RegTech

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