Reap the Benefits and Navigate the Challenges of the Growing RegTech Market

Financial authorities have already made it clear that automation is the way for FinTechs to face the challenges of regulatory change management.

A report from the City of London Corporation states that

“RegTech represents more than just an efficiency tool and rather is a pivotal change leading to a paradigm shift in regulation. Viewed holistically, RegTech represents the next logical evolution of financial services regulation and should develop into a foundational base underpinning the entire financial services sector.”

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The Difference Between RegTech and FinTech

Although FinTech and RegTech are inextricably linked, by their very nature they differ.

The FinTech industry is associated with a disruptive innovation that “shook up the financial industry and substantially changed its competitive patterns.”

RegTech, however, while disruptive of incumbent technology providers, is enabling financial services firms to cope with disruptive challengers and meet their compliance requirements.

RegTech is not FinTech, but it is a technology that can and should be used by financial services firms to enhance their compliance standards.

The Growth of RegTech

The RegTech market size was valued at $6.68 billion in 2020 and will estimatedly grow nearly 5x to $33.1 billion by 2026.

Businesses are beginning to see how profoundly RegTech can help them manage risk and compliance activities — as evident from the market's CAGR of 21.27%.

The RegTech Taxonomy

Today, regulation touches nearly every aspect of a financial institution, and RegTech solutions exist to address all these problems. The Cambridge Center of Alternate Finance (CCAF) has mapped the following RegTech taxonomies in existence:

  • General Compliance

 

  • Regulatory Reporting

 

  • Tax Compliance

 

  • Financial Crime

 

  • ESG
  • Cyber, Identity and Privacy

 

  • Regulatory Risk Analytics and Calculations

 

  • Market Integrity and Transparency

 

  • Regulatory and Compliance Management

 

  • Regulatory Data and Information Management

Currently, the top applications for RegTech are:

  • Compliance Management

 

  • Regulatory Intelligence

 

  • Risk Management

 

  • Identity Management

 

  • Fraud Management

 

  • Regulatory Reporting

Technologies Driving RegTech

The top technologies that underpin the development of RegTech solutions are:

  • Artificial Intelligence and Machine Learning — AI/ML
  • Distributed Ledger Technology — DLT
  • Cloud Computing
  • Application Programming Interface — API
  • Robotic Process Automation — RPA
  • Biometrics

Benefits of RegTech

The report from the City of London Corporation points out that

“The benefits and opportunities of RegTech for regulated entities and supervisory authorities to improve efficiency, reduce manual processes and make effective use of data are enormous. As they are more widely adopted, these technologies can enhance diligence and vigilance in risk monitoring and management in real time, improving the resilience and stability of the broader financial system.”

Businesses that have implemented RegTech are seeing numerous benefits, such as:

  • Making banking regulations accessible
  • Automatically extracting regulatory obligations
  • Reducing time and costs needed to be compliant
  • Staying ahead of the changes and becoming more competitive

Regulators are now relying on standardised and unambiguous information. And as more data is fed into the machine-readable system, it keeps improving over time, and is turning the compliance and reporting process into a virtuous circle.

RegTech is also redefining the relationship between the regulator and the regulated — because of cloud-based machine-readable RegTech applications, reporting is always “on,” making businesses more transparent to their customers.

Challenges of RegTech

There are also some critical challenges associated with adopting RegTech:

 

  • Talent: lack of professionals with the right combination of technical skills, compliance knowledge and financial background

 

  • Awareness: many firms aren’t clear what RegTech is and how it will help them

 

  • Technology: legacy systems make it harder to integrate RegTech solutions and establish interoperability

 

  • Vision: there’s an overall lack of vision and strategy at the leadership level that’s affecting tactical deployment

 

RegTech is a relatively new sector but one that is already critical to the regulatory industry. Financial institutions and regulators have to understand the critical role it will play.

Sign up for the Cambridge RegTech: AI for Financial Regulation, Risk, and Compliance programme to understand the potential RegTech has in bringing about far-reaching benefits, from improving customer experience to gaining a competitive advantage through compliance.

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