RegTech – Part One

What is RegTech? Why does it exist? What is its future?

The latest in our Capco Institute video series draws on insights from a distinguished panel of senior banking, technology and legal practitioners. We invited them to discuss what RegTech is, what some of its “hot areas” are, what kind of role the regulator will play in its development and what issues anyone developing viable RegTech solutions should keep front of mind.

This blog details some of the discussion around those first two issues: what exactly is RegTech, and where are the RegTech hotspots today?

What is RegTech? The clue is in the name.

RegTech is not merely another industry buzzword that may or may not last. A working definition emerging from our discussion is, “The use of technology to create or transform models for reporting, monitoring and compliance in highly regulated industries.” More briefly, we can define it as, “New and better ways of delivering regulatory compliance using technology.”

RegTech is going to be with us for the duration, and the reason for this lies in the name: This is regulation-driven technology. The obvious – yet crucial – corollary is that financial institutions will not have a choice. FIs may choose to adopt the outputs of RegTech’s flashier cousin, fintech, or they may not. By contrast, the regulator offers no choices when it comes to compliance. And, with reputations at stake, it follows that compliance is the non-negotiable endgame of RegTech.

In a climate of sustained regulatory pressure after the recent financial crisis, it’s not as if institutions have sat idle, waiting for RegTech to ride in and rescue them. Institutions have reacted to the regulatory tsunami – a graphic but accurate term – with a series of internal technology solutions. Inevitably, these solutions have been tactical in nature. As a result, we see deep-seated and expensive inefficiencies as institutions attempt to deal with one regulation after another.

RegTech exists because financial institutions’ internal technology responses to compliance weren’t enough.

RegTech offers a new technological take on achieving compliance. Instead of a myriad of separate solutions that all attempt to feed from the same data source, RegTech offers a coherent alternative of streamlining, efficiency and cost controls. The heart of RegTech’s appeal is its credible promise to replace proliferating and hugely expensive regulatory operations and technology teams. In their place comes efficient, cost-effective and future-proofed compliance.

The appealing “golden combination” of relieving cost pressures and satisfying regulatory requirements is also the reason RegTech will remain important in the financial industry until the end of regulation itself. Given its entrenched position, where can we find RegTech’s hotspots? How is RegTech evolving, and what is it focusing on?

Unlike fintech, RegTech tends not to follow the money, in terms of on-trend innovations. Instead, regulatory risks and supervisory priorities set RegTech’s path. Thus, it comes as no surprise that RegTech will continue the ongoing focus on regulatory reporting. Building on this housekeeping function, however, is an arguably more intriguing commercial dimension.

RegTech can only comply, not compete, right? Wrong.

The received wisdom is that regulatory compliance offers no great competitive advantage; compliance is just required to stay in the game. However, one RegTech hotspot is challenging that notion. As business models become increasingly data-driven, anticipate solutions that use analytics to kill two birds with one stone: new automated approaches to compliance and new revenue opportunities, both extracted from analyzing the same data. There will also be increasing emphasis on management information. Here, RegTech can transform historical records into a living, high-level view of risk and how effectively an FI is managing and mitigating it.

One RegTech hot area that requires no gift of prophecy is crime. Preventing fraud and other financial crime is huge business: half of all RegTech spending now targets crime prevention, up from 14 percent only two years ago. In the cat-and-mouse game of preventing identity theft and avoiding fines and reputational damage, expect machine learning, data analytics and dynamic data processing to play an ever-greater role.

Finally, one of the biggest challenges of regulatory compliance is its highly distributed nature. Different jurisdictions and differences in regulations make global compliance an expensive patchwork undertaking. RegTech will apply machine-learning tools to streamline and simplify the complexities of interpreting multijurisdiction rules.

In Part Two of this blog we review the regulator’s role in RegTech’s development and what issues anyone developing viable RegTech solutions should have front of mind.


About the Author

Jack Beldon

Jack Beldon is a managing principal at Capco London specializing in capital markets regulations. He has more than 15 years of experience delivering world-class operating models for leading investment banks.


The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.