Over the last decade, rule changes have surged by 500 percent. Thomson Reuters’ 2018 Cost of Compliance Report reveals that a new regulatory update is implemented every 7 minutes. Fines for non-compliance are escalating, demonstrated by the SEC issuing 862 enforcement actions in 2019, totaling over $4.3 billion in penalties. In that same year, the FCA imposed its largest-ever personal fine. To address these challenges, a burgeoning industry known as RegTech has emerged. RegTech solutions comprise a diverse array of tools designed to assist organizations in navigating the evolving regulatory landscape and conducting their business activities in a more compliant manner.
What is a RegTech Solution?
RegTech encompasses the use of advanced technologies and tools, such as big data, the cloud, API, biometrics, robotic process automation, artificial intelligence, machine learning, and blockchain, to effectively manage regulatory processes and operations. Its primary focus lies in areas such as compliance, reporting, and monitoring.
RegTech solutions provide businesses with enhanced capabilities to comprehend and control risks, combat cyber threats, and stay updated on emerging legal requirements aimed at addressing these challenges. Moreover, they enable organizations to generate additional value without the need for replacing or upgrading their existing systems while ensuring compliance with relevant regulations.
Why Use RegTech Solutions?
Banks and financial institutions serve as the foundation of the contemporary economy, offering loans, facilitating transactions, insuring valuable assets, and providing an array of financial services. Simultaneously, they face mounting pressure to adhere to regulations, safeguard sensitive data, and thwart fraudulent activities. The practical reality is that financial entities cannot meet existing regulatory requirements without leveraging some form of automation, and this is where RegTech solutions for banks step in.
In this context, RegTech transcends being merely a sophisticated tool; it emerges as an indispensable necessity, particularly within the banking sector. These solutions empower companies to operate under the law, mitigate costly errors, and enhance internal processes, solidifying their essential role in the banking sector. Moreover, they enable cost savings, while maintaining responsiveness and flexibility. Given the persistent threats of cybersecurity, fraud, and escalating regulatory complexity, the importance of RegTech solutions for the banking sector is only set to increase in the future.
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Consequently, for a modern financial institution, the adoption of RegTech solutions in the banking sector is imperative.
Benefits of RegTech Solutions
According to a report from RegTech Analyst, the number of investment deals in the RegTech sector worldwide skyrocketed from 149 deals amounting to $1.1 billion in 2015 to 317 deals totaling $8.5 billion just four years later.
The major benefits of RegTech solutions for banks are:
- Efficiency gains: With the constant expansion of regulations, it is extremely challenging for compliance professionals to stay updated without the assistance of technology. Technology plays a crucial role in this regard, as it is capable of efficiently processing large amounts of data and swiftly analyzing intricate legal documents to extract valuable information.
- Greater accuracy and comprehensiveness: Implementing appropriate technologies and integrating them strategically can address the gaps and inefficiencies caused by manual and disjointed processes in compliance operations. This not only reduces the risk of human errors but also improves overall compliance efficiency.
- Greater internal alignment: Technology tools facilitate increased transparency across organizations, effectively bridging the gap between previously isolated individuals and procedures. As a result, this promotes enhanced understanding and collaboration between different business units, enabling faster sharing of valuable insights and fostering a culture that prioritizes compliance.
- Improved risk management: RegTech solutions offer a wide range of capabilities to mitigate different forms of risk, such as market abuse, cyber attacks, and fraud, by actively monitoring systems and promptly notifying personnel about any potentially suspicious activity.
5 Key Categories of RegTech
Deloitte, based on the analysis of approximately 333 RegTech companies, was able to distinguish and categorize Regulatory Technology into five primary categories as stated below.
1. Compliance:
AI and machine learning play a crucial role in ensuring the effectiveness of RegTech compliance solutions by automating tasks such as searching for new regulations, reporting, data analysis, and sharing the impact of changes. Algorithms in tools like 6clicks monitor and track compliance in real time.
2. Identity Management:
RegTech solutions use AI and machine learning to streamline Know Your Customer (KYC) processes by gathering and analyzing information from multiple sources.
3. Risk Management:
RegTech tools use AI to monitor and identify risks, predict market changes, detect compliance and regulatory risks, assess exposure, and anticipate future threats in the financial sector.
4. Regulatory Reporting:
AI-powered software automates regulatory reporting processes, including regulatory change management, data validation, processing, categorization, classification, and analytical calculations. Tools like acarda GmbH enable automated data distribution, real-time reporting, and cloud solutions for significant time and cost savings.
5. Transaction Monitoring:
Robotic Process Automation, combined with Blockchain technology and cryptocurrency, enhances transaction monitoring in real time. Tools like Analyze N Control use AI to analyze and flag potentially suspicious or illegal activities faster and more accurately than traditional methods.
RegTech vs FinTech vs SupTech
It is important to note that RegTech solutions are frequently mistaken for FinTech, despite being distinct concepts.
The key distinction lies in the fact that FinTech revolves around the creation and provision of cutting-edge technologies and resources aimed at enabling the delivery of enhanced financial services.
RegTech, conversely, refers to the utilization of technology-based solutions that assist financial institutions in enhancing the effectiveness and longevity of their regulatory compliance operations.
In addition to this, it is important to distinguish between RegTech and SupTech. The latter is centered around enhancing the effectiveness of supervisory bodies by employing advanced technologies like artificial intelligence and machine learning.
Summing it Up
The transformative power of RegTech solutions is evident in their ability to revolutionize compliance processes across various industries. From leveraging AI and machine learning for real-time monitoring to automating complex regulatory reporting, these innovative technologies not only enhance efficiency but also mitigate risks. As organizations navigate the ever-evolving landscape of regulations, adopting RegTech tools becomes not just a choice, but a strategic imperative. The future of compliance is undoubtedly shaped by the integration of intelligent technologies, paving the way for a more streamlined, accurate, and resilient regulatory landscape.
