RegTech, short for Regulatory Technology, is making waves in
the financial industry. It promises to disrupt regulation as FinTech is doing
with finance: using technology to dramatically increase efficiency, cut costs
and reduce risks with innovations such as cloud computing, big data and
blockchain. The FCA defines it as:
‘… a sub-set of FinTech that focuses on technologies that
may facilitate the delivery of regulatory requirements more efficiently and
effectively than existing capabilities.’
Increasingly, we are seeing such technologies being
developed to manage the growing volume of regulatory requirements, a challenge
that has been around for a long time. The past few years have seen an explosion
in innovation and the adoption of compliance-focused tech. As a result, RegTech
is not only changing what it means to be a compliance professional, but also
the very relationship that financial institutions have with regulation.
A Paradigm Shift in Compliance
As with legal developments, regulatory technology has always
progressed more slowly than the more glamorous areas of finance, such as
trading or communication. Traditionally, compliance software has had a
reputation for being enormously complex, difficult to maintain and subject to a
lack of innovation. A common attitude was ‘the less spent on compliance the
better’, and firms looked to find a solution that ‘just worked’ as cheaply as
possible. A lower software cost was prized more highly than the reduced risk of
fines or sanctions. Consequently, compliance systems languished and compliance
teams were stuck manually completing tasks that the rest of the industry were
automating.
The nature of the financial industry meant that even when
upgrades for financial software were eventually made available, the time and
resources needed to install them would outweigh the benefits of any new
features or functionality. Why invest in an armada of consultants and extensive
testing of a new system, when the previous one had ‘just worked’ for the past
five years?
The regulatory aftermath of 2008’s financial crisis changed
the minds of some, as the importance of complying with financial regulation
came to the fore and firms drastically needed to bolster their compliance
capability or face considerable fines and sanctions from regulators. This
sudden increase in demand for more powerful, flexible and cost-effective
compliance solutions was arguably the greatest driving force behind the RegTech
economy, leading to the creation of dozens of RegTech firms utilising years of
compliance experience to capitalise on a hungry market that hadn’t seen
innovation in decades. As Mark Taylor from Law360 put it:
‘With London still dogged by banking scandals almost a
decade after the financial crash, the FCA, tasked with both a consumer
protection and competition mandate, sees regtech as a simple solution that
satisfies both.’
The latest generation of RegTech represents a paradigm shift
in terms of not only what compliance technology can do, but how it is bought,
delivered and refined. In the past, a compliance solution would often require
its own hardware, software licences and dedicated on-site maintenance staff.
Today, a RegTech provider such as FundApps
or ComplyAdvantage can update its
services using the cloud and a few APIs. What might have been a six-month
upgrade project two years ago can now be done virtually overnight with RegTech,
significantly reducing the time and risk that traditionally came with
technological progress.
In many ways, RegTech looks remarkably similar to the
compliance technology that it has evolved from. It still represents a way for
financial institutions to maintain compliance with the mountains of regulation
that they are subject to, just like the twenty-year-old platforms it replaces.
What is less recognisable, however, is the speed and efficiency that RegTech
brings to the compliance profession.
What does RegTech bring to the table?
As noted by Deloitte in their report ‘Is
RegTech the new FinTech?’, the key distinction between RegTech and
traditional solutions is agility. RegTech solutions aren’t encumbered and
restricted by having to provide legacy support for financial institutions still
using ancient versions of their software, and can much more easily provide
modern features that are taken for granted in other parts of the financial
industry. Features such as improved analytics, enhanced scalability, better
data warehousing and improved automation brought by RegTech are making
compliance less of an art and more of a science, and the impact this is set to
have on compliance professionals is profound.
One of the best examples of where RegTech is having an
impact is managing regulatory change. Regulatory change poses a particular set
of challenges to the compliance professionals tasked with meeting a firm’s
regulatory obligations. These include:
- identifying when and where regulation has changed
- interpreting the new regulation
- adapting a firm’s compliance processes to meet the new
regulation - developing mechanisms to test that compliance is being
maintained correctly.
For financial institutions that are subject to regulation in
a number of different countries or jurisdictions, the time and effort needed to
complete the above tasks can quickly overwhelm even the most well-resourced
compliance teams. RegTech provides arguably the best way to meet these
challenges, as the increase in efficiency it brings amplifies a firm’s
compliance capability.
RegTech and Legal Compliance Professionals
RegTech also provides a way for legal professionals to cut
down the time spent on menial and repetitive tasks and dedicate the hours they
save to other important and more nuanced tasks. In some areas of compliance,
such as shareholding disclosure, it is not uncommon for individuals to spend
more than one day a week simply checking for regulatory change – let alone
interpreting those changes or ensuring a firm’s compliance to new regulation.
As with many professions, there is some concern that cutting
edge technological developments such as AI and machine learning will render
some compliance jobs obsolete, moving them to the domain of invisible machines
that don’t tire, make mistakes, or book time off. While the impact RegTech is
having on certain areas of compliance is massive, demand for specialist legal
and regulatory insight and experience on compliance teams is not going away
soon. For the legal profession, it also offers an opportunity to stave off the
threats of innovation replacing the humble lawyer. Developments in RegTech are
likely to have a significant impact on the interaction between businesses and
the regulators. Legal practitioners have a chance here to act as a bridge
between those RegTech firms that are leading in innovation and the regulators.
It also provides an opportunity for regulatory lawyers to be freed up from the
menial tasks in order to focus on adding more value at a strategic and business
level.
Not only is RegTech already changing the way compliance teams work at some of
the largest financial firms in the world, but it is enabling them to get more
done, in less time, with greater accuracy. Certain financial regulators, such
as the FCA and Singapore’s MAS, are already demonstrating a commitment to
supporting RegTech, with regulatory sandboxes and ‘innovation sprints’. With
this in mind, one can expect compliance to become more data focused and less
manual. It is reasonable to expect that the skills that make a compliance
officer great today will shift as RegTech develops and strengthens its hold in
the financial industry. A strong grasp of data analytics may even become more
desirable than an in-depth understanding of regulation for compliance roles, as
RegTech shakes up the financial industry in the same way that technology is
disrupting everything from retail, through transport, to medicine.
Lorraine Chimbga is a UCL Law graduate, and currently works
for FundApps analysing financial regulation and translating it into algorithms.
Ryan Barnes currently works as a Marketing Manager
sharing FundApps’ mission to make compliance simple.
