Regulators frequently revisit regulations to protect consumers, keep up with new technology, financial crime and industry-based risks. This poses a challenge for businesses and financial institutions complying with the ever-stringent laws.
Our surveys show that companies affected by this challenge of regulatory change care more about efficiency than cost savings which is a compelling argument for companies and financial institutions to tap into RegTech’s transformative potential. But what exactly is RegTech and how can it shape the future of compliance management in financial services? That’s exactly what we’re going to cover in this article.
What is Regulatory Technology?
RegTech—a term merging both regulatory and technology—denotes companies that address regulatory challenges in the financial services industry through the use of innovative technologies.
The regulatory environment has been expanding constantly since the 2008 financial crisis. Demand for new regulations comes from public, government and regulatory bodies and has resulted in an explosion of scope and complexity with regards to the regulatory environment. RegTech is therefore commonly seen as a solution to this increased complexity and as an alternative to traditional (meaning manual) approaches legal and compliance.
The way we see it, RegTech is far more than merely a collection of solutions to specific regulatory challenges. And too often, RegTech is also misunderstood as professional services in the regulatory space or developing custom software solutions. At Apiax, we believe that RegTech is about building highly scalable SaaS platforms, thus helping financial institutions to build a digital-first compliance strategy to increase efficiency around staying compliant.
The difference between RegTech and FinTech
Although we see both walking hand in hand, RegTech and FinTech are independent of each other and address different needs. The FinTech revolution has created numerous innovations around providing financial services to clients. However, similar to traditional financial institutions, FinTech innovators have to comply with respective regulatory requirements. This has led to a robust demand for RegTech solutions by FinTech companies.
According to Andrew Yuille, Head of Risk Business Solutions at Thomson Reuters, while “RegTech is looking at how institutions, banks, insurance companies or even regulated entities can comply with regulation and do it in a more efficient way, FinTech is looking at innovative solutions, typically for consumers, in the little gaps left by financial services organizations, bigger banks or insurance businesses.”
Where RegTech can be used
Regulatory software can be used whenever the topic is linked to compliance obligations. It can be especially useful for financial institutions since they’re often highly regulated. Here are the most common branches where RegTech can be used:
- Suitability in wealth management
- Fund distribution in asset management
- Cross-border marketing and travel management
- Anti-money laundering (AML) in general
- Client onboarding, including knowing your customer (KYC)
Other legal and compliance areas that may benefit from regulatory technology are data protection or marketing material review.
What are RegTech solutions
When hearing about RegTech solutions, one might immediately think of a compliance system or a platform. In fact, that’s not too far from the truth. That said, it’s important that you address the real compliance needs of your business in order to choose the most suitable RegTech solution. In addition to the topics mentioned above, RegTech solutions as compliance platforms, compliance apps, or rule sets that use regulatory intelligence, are the most common. Depending on the provider, some compliance systems might be more intuitive than others, with more innovative features or leaner integrations.
RegTech for compliance management
Keeping up with the latest technology, regulation and compliance can be a resource-intensive task. Companies, financial institutions and other regulated entities are thus keen to deploy RegTech solutions to customise their risk assessments by industry, customers or business activities.
RegTech for banks
According to International Banker, the global compliance expenditure by banks reaches more than $270 billion a year, with an average of 10–15% of the workforce engaged in compliance processes. RegTech for banking can play a huge role in automating compliance processes in order to optimize efficiency and improve performance against competitors that are stuck to a traditional modus operandis.
RegTech for regulators
In the not too distant future, we believe that regulators will distribute regulations digitally. Financial service providers will transform these regulations seamlessly into digital rules to be distributed and executed at the click of a button. Client-facing employees will have direct access to these digital rules on their devices. In this new reality, regulatory experts will require an entirely new, digital workplace.
RegTech and cybersecurity
Financial services companies need to follow very concise regulations and restrictions, also when it comes to cybersecurity. RegTech can help such companies by supplying continuous monitoring of security compliance. Through security logs and technical audits of the organisation's software and systems; dividing customer processes from corporate ones; transitioning to cloud-based software and servers, among others. In other words, cybersecurity is intrinsic to RegTech.
Why RegTech is financial services' best ally
When we think of RegTech, there are several industries that could benefit from it. Basically, all industries worldwide that are highly regulated like insurance, pharmaceutical, banking, as well as financial services. If you work in financial services and you’re thinking to adopt RegTech to ease your compliance management, here are some ways of how it can truly become your best ally:
Cloud becomes core to deliveries in regulatory compliance
RegTech deployment on the cloud is picking up speed, and innovative cloud-based services and niche deliveries are taking shape. As the RegTech ecosystem gets a strong foothold within the compliance landscape, the transition of compliance operations is happening more seamlessly. For instance, data sharing, near real-time checks, customised solutions for compliance-as-a-service, or dedicated tools for various touchpoints of compliance like customer onboarding and new business relationships.
With GDPR being a core requirement for EU countries and businesses operating within the EU jurisdiction, companies and regulation professionals are looking for ways to address applicable data protection rules and ways to comply. One way that is being addressed is through, and that is gaining steam, is the design of enterprise systems for automated compliance using innovative SaaS API models.
Unabated digital transformation of regulations
Whether it be MiFID II, GDPR, AML, FinSA or FinIA, the terminology of text-based directives can be daunting even to the most seasoned professionals. By digitalising text-based compliance manuals into powerful digital regulatory rules and bringing them under a single loupe, RegTech emerges as a powerful facilitator. What is more, the use of ‘compliance by design’ reinforces the culture of compliance. More and more compliance programs are being designed for seamless and automated monitoring, checking, and report generation. This supports the organisational response to smart policies, by blocking or passing actions based on the law.
As a ‘compliance layer’, such regulatory rules ensure across-the-board regulatory compliance for diverse business types, industries, geographies and other laws. Compliance automation of minimises the risks of human error, reduces operational costs and supervisory controls, and averts potential penalties by proving a robust system of compliance and organisational agility.
RegTech helps strategise the regulatory impact of business decisions
While ROI is an established benchmark for business performance, RegTech is quickly becoming essential for measuring the regulatory impact and viability of business decisions and commercial initiatives. Digital tools allow the identification and implementation of relevant laws and frameworks for multi-jurisdictional navigation and easy compliance.
With the right solutions in place, high-risk factors can be identified at the click of a button as well as the regulatory impact on the chosen business strategy. Whether expanding within or beyond established market segments, digital tools provide clear answers to regulatory inquiries, essential to help define the direction of travel and appropriate business actions.
Tax-efficient investment support for businesses (the new RegTech tour de force)
As tax authorities ramp up the scope of governance, RegTech has stepped in as a vital means for offering profitable, tax-efficient investment advice. Digital tools help investment professionals at each point in the value chain; from developing investor profiles to producing promotional material and allocating assets. RegTech solutions identify relevant tax rules and help predict their impact on investment strategies. With accurate tax impact calculations and after-tax performance, modern tools are essential for wealth managers wanting to develop viable investment ideas.
RegTech finds adoption by Regulators
As regulatory pressure builds up, organisations and regulators alike struggle to interpret the broad scope of business application. In the past years, we have seen regulators themselves struggling with supervising global financial players especially due to inconsistent data. . We predict that country regulators will first make use of RegTech to understand and analyze data relevant for regulatory supervision. In a second phase, regulators could replace text-based and therefore ambiguous regulations by machine-readable regulation and become publishers of digital regulations.
RegTech emerges as the ultimate solution for facilitating supervision, with minimum cost outlays and maximum operational efficiencies — which makes it widely attractive for regulators to adopt.
Smart tools for cross-border risk management
Regulatory risks associated with cross-border transactions have risen sharply in recent years. Automated workflows and the ease of instant access to virtual client meetings pose an additional regulatory liability for companies and a need for a robust compliance framework. International standards may oftentimes be more stringent than those governing local, national business activities. In the same way, industry standards and legal requirements vary significantly between countries, making guidelines contradictory or difficult to interpret.
In the context of offering financial services on a cross-border basis, you often end up juggling multiple jurisdictions and complying with countless rules. Managing these risks can be costly and cumbersome. RegTech offers a single interface for monitoring cross-border business activities and implementing compliance frameworks. This means that ambiguous explanations can be simplified, industry do’s or don’ts digitised and machine-readable rules integrated into the workflow (for automated monitoring on activity or even financial product level).
Consultations with in-house compliance experts can be significantly reduced, and global initiatives and expansion plans facilitated with rules-based RegTech designs. This empowers financial institutions such as private banks, asset managers or FinTech startups, as they can now serve clients across many different jurisdictions.
How to choose the right RegTech partner
Finding a RegTech partner with an innovative solution and many useful features to remove friction from your compliance processes is obviously important. However, before partnering with a RegTech company, the following criteria might help you with the selection and decision-making process:
Identify your needs
Start with a clear identification of what are your real compliance needs and on which regulatory topics. This allows you to understand which features are really necessary, on a pay-for-what-you-need basis.
RegTech aims to simplify complex regulations through software. Try to understand how easy it is to use a certain system, and make sure it will cause less friction not only in your department but throughout the company.
When looking for a RegTech enterprise to partner with, look for possible software companies that might facilitate the integration with your own system. In the case of direct compatibility, the process might even be shorter.
Support in your language
Having a team that speaks your language and who you can communicate with through email or phone is highly recommended. This guarantees that not only the initial integration goes as planned, but also to ensure a smooth transition from a manual to a digital compliance management system.
References and reviews
Commercial investigation allows you to feel more confident when investing in compliance management software. In other words, visit the company’s website, Google reviews, look for social proof, and see which other entities within your industry are buying from them.
It’s likely that one of your favorite options may not meet all your criteria. In that case, try to evaluate which one will fit most of your needs and that can be a sustainable solution for your business in the next years to come.
How to integrate RegTech within your existing software
After evaluating your compliance needs, it’s important to consider how to integrate a RegTech solution into your business. Depending on the RegTech company you’ve decided to partner with, there might be different approaches on how to do this. The way we see it at Apiax, the digitalisation of this regulatory compliance can come up in 3 different ways:
This is the most suitable option in case you’re looking for a no brainer solution. You can use your own browser to open an app portal, from where you can access all relevant features. This is the case of Apiax Apps Portal.
For a hassle-free start, using white-label UI widgets allow you to use an in-house app almost as a native tool and adapt it as you prefer.. You only need to select the right rulesets and regulatory knowledge.
In case you’re looking for full integration with your current system to remove any friction end-to-end, working with an API is one of the most popular choices. Search for a well-documented API that can save you implementation time and resources when scaling your compliance practices.
Please bear in mind that the options mentioned above are our own take and evaluation of what we believe is important when considering a RegTech solution. Some of the compliance management software may already have some integration options, or lack features that may be of use to you, factors that can ease or sway your decision.
The adoption of RegTech is increasing worldwide and its advantages for financial services are manifold. With digital transformation booming in financial services, RegTech solutions can help regulatory experts to remain compliant continuously and to steer clear of fines, penalties, and reputational damages. To institutions, it delivers increased productivity and efficiency, through compliance automation.
When it comes to choosing the right RegTech partner, having your requirements clear from the beginning allows you to choose the software that fits your business best. As explained, RegTech solutions can fit many branches of regulatory topics.
Besides useful features and easy-to-use software, take note of security measures and look at the options the RegTech company offers in regards to integration processes between your current system and their new compliance management software. In addition to saving you hundreds of hours in manual compliance management processes, RegTech solutions can provide more peace of mind and allow you to focus on other priorities of your business.