#regtechinnovation

Regtech can also be used by regulators to improve their ability to digest the greater volume of data that is fed to them due to the Basel III capital adequacy regime, more stringent anti-money laundering (AML), KYC, sanctions, tax and other such rules.

Financial institutions can use technologies such as artificial intelligence (AI), machine learning and big data analytical techniques to organise and control their regtech data in a more efficient fashion. This enables simpler compliance with financial crime controls, more efficient adherence to stringent conduct rules and Basel III reporting requirements. It also gives better data control leading to improved customer targeting, tracking and service.

The need to protect data from numerous cyber risks can also be enhanced by improving data handling – a key characteristic of regtech solutions. Cloud computing, with appropriate security and standards, can also be used as a supporting technology to improve the sharing of data across financial market infrastructures, where it is safe to do so.

Regtech start-ups are often better at data mastery than banks. Data is almost a religion for technology companies. FIs are therefore keen to collaborate with start-ups to learn how to use data better within their organisations, expose it more cheaply for regulatory reporting reasons, or to get simultaneous business benefits such as improved loan decisions, or better liquidity pricing.

Meanwhile, mastering internal or external data can also improve auditability and risk monitoring, for example on AML, across disparate financial supply chains. This may help slow fines, the risk of reputational damage and the trend of banks de-risking.

“Superior regtech can reduce costs significantly, allowing companies to free up capital to invest in more productive areas,” says Simon Eacott, head of payments innovation at NatWest. “The potential of AI in regtech to analyse both internal structured and external unstructured big data at speed, with little manual effort, is attractive. In the risk management field, regtech can help create superior data modelling that more accurately conveys a company’s risk profile.”

Jean Devambez, global head of product and solutions, asset and fund services at BNP Paribas Securities Services, says the key driver in the rise of regtech is the increasing number of regulations “generating complexity and cost”.

The fall in banks’ return on equity since the 2008 crash and contemporaneous rise in compliance costs as new, more stringent regulations were introduced, mean that FIs must cut operational costs and increase controls. It is clear to see why trying to harness the innovation of fintech start-ups for compliance is attractive.

However, Garrison urges some caution on this point. Financial services providers are increasingly looking to partner with technology vendors to aid in compliance with new regulations and to address ongoing cost pressures, he says. Collaboration between financial market participants and technology vendors, particularly in the implementation of new technologies, can create efficiencies, reduce expenses and mitigate compliance risk. “However, modernising high volume legacy systems that already facilitate compliance and operate well can be an extremely complex and expensive undertaking. Firms must therefore consider business cases whenever assessing technology changes to ensure the cost of the changes are aligned with the value which can be derived from them.

“Also, when implementing new technologies, while cost savings can be achieved by decommissioning systems, there are occasions when legacy systems have to remain in place and operate alongside new solutions, which means that the financial benefits may be reduced.”

The Boston Consulting Group report, Global Risk 2017: Staying the Course in Banking, estimates FIs spend $18-$21 billion on AML; $16-$19 billion on KYC; and $11-$15 billion on conduct surveillance.

It’s a big market for vendors. Cyberdefence risks, regulatory reporting duties and financial utilities mean that the compliance processing and related regtech market is potentially worth hundreds of billions of dollars.