How RegTech Is Transforming Compliance

Reducing the regulatory burden through RegTech

Regulatory compliance is an area where companies cannot afford to take risks. The failure to meet laws, regulations, and guidelines around business conduct can swiftly lead to significant fines, reputational damage, and even the closure of a company for good.

Yet compliance can be a cumbersome process. Historically a labour intensive, manual operation, compliance is typically carried out by large teams of people – at significant cost. It is therefore an area ripe for innovation.

Luckily, technology is helping to provide the solution. Alex McGill, financial services expert at PA Consulting, the global innovation and transformation consultancy, spoke to DISRUPTIONHUB about RegTech – regulatory technology that is changing compliance for good.

Comprehending compliance

Compliance – whilst a very important business term – can signify a host of different things in practice. It ensures that companies follow the laws which govern their respective industries, and most obviously applies to financial services.

Although the way in which a business achieves compliance may vary, McGill notes that organisations typically demonstrate it through expensive, people-intensive processes.

“Historically, you’d have big teams within an organisation looking at compliance, reporting on it and checking that everything is working as it should,” he says. “But what that drives is a lot of cost within the organisation. Given where banks are at the moment there’s a lot of pressure across the industry to try and strip cost out of non-revenue generating areas. Compliance is firmly in focus of this because it is a cost centre rather than a revenue generating function.”

As with many laborious and costly legacy business processes, compliance is now being transformed by technology.

“RegTech is all about how you can use technology to achieve compliance more simply,” says McGill. “What we are trying to do with RegTech is simplify processes and automate things with technology. In doing so we can make the compliance systems more effective and efficient to run.”

Automation, automation, automation

So what do these kinds of regulatory technology actually look like? It probably comes as no surprise that automation, AI and data come top of the list.

“The most effective pieces of technology are often the simplest,” says McGill. “But increasingly what we’re seeing is a shift towards the more advanced, new, disruptive technologies, for example machine learning and AI.”

“A good example might be using AI to identify patterns typically associated with risk, and then using machine learning to either prevent it, or identify it and take action early.”

“Another good example is the reporting of regulatory data. As part of compliance firms often have to report large data sets to the regulators to prove to them that they are operating in the right way. That is quite a challenge for them given that the data is often held on many different systems, it’s not accessible, and it’s quite difficult for them to extract it and send it across.”

“There’s lots of technology out there now helping to address that problem. It’s helping compliance teams to extract data, pull it all together, produce it in the right format and send it over to regulators.”

Crucially, McGill adds, this also helps the organisations themselves to make the most out of that data internally.

“Once you have all of that information,” he notes, “you can generate really powerful insights and drive different business behaviours.”

The current state of play

With such a transformative set of technological tools at their fingertips, it’s no wonder that many businesses are coming round to RegTech – in principle, at least. But is their interest being translated into concrete action?

“I would say there’s a lot of interest in RegTech as a concept, but at the moment there’s a lot more talk than action,” McGill says. “What we’re seeing is a natural scepticism for some of these new technologies and also the fact that some organisations are not quite in a position to leverage them. For example, the technology solutions being pitched are too mature for some organisations, because they don’t really have the fundamental building blocks in place.”

Returning to the above example around data, McGill notes that there are automated tools which can extract, aggregate and send compliance data to the regulator. However, many organisations wouldn’t actually know where their data is held, what format it’s in, or what might be missing. In these instances, the technology is actually too advanced for the organisation, which first needs to implement better data governance.

“What we’re seeing is an ambition to adopt and to scale RegTech,” says McGill, “but further work needs to be done for it to be most effective.”

A question of competition

As with many new innovative technologies, investment around RegTech is booming. The number of RegTech firms in the UK rose from around 200 in 2016 to over 700 in 2018, with similar or higher levels of growth expected in the future.

According to McGill, the UK’s Financial Conduct Authority (FCA) has had a large part to play in this growth.

“We’re increasingly seeing a lot of investment going in to RegTech, particularly in the UK,” he says. “The regulator here – the Financial Conduct Authority – has done a brilliant job of creating an environment where innovation and disruption is encouraged. That’s meant that the UK is very well positioned to drive growth in these new RegTech organisations, because there is a regulatory appetite for it.”

The reason for this is fairly obvious, with RegTech helping the FCA to ensure that firms are operating in the way it would like. Yet the positive attitude of UK regulators towards innovative technology can also be attributed to their competition mandate, which sets them apart from regulatory bodies in other countries.

“East Asian regulators such as the Monetary Authorities of Singapore and Hong Kong have also been very pro innovation,” says McGill. “They’ve looked closely at what the FCA is doing, to drive innovation there.”

“However, in the US they are a bit more hesitant. This is mainly driven by the fact that they don’t have a competition mandate, so they are a bit happier with the status quo, and again a bit more sceptical of innovative new products that present themselves to be silver bullets.”

The UK does it best

Thanks to the positive outlook of its regulators, a pro-business environment, and a significant talent pool, McGill expects the UK to remain ahead of the curve when it comes to promoting innovation in financial services.

He also expects to see some RegTech businesses rise above the others in the near future.

“There’s some themes emerging around the key use cases these companies are trying to address,” he says. “We anticipate some winners starting to emerge for those key use cases. For example, once you’ve developed a great transaction monitoring tool for financial crime, and you prove that concept and sell it to a financial organisation, that next sale is easier. You start to build a critical mass where you’ve got more and more clients coming on board and it becomes industry standard.”

“The winners will be the companies with the best technology offering but also those who are quick to market. They need to get their feet in the door and prove that their system works within some of these large scale organisations.”

Stay up to date with the latest from DISRUPTIONHUB, by signing up to our free weekly newsletter.