RegTech – the growing technological revolution

One of the fastest growing sectors of the FinTech revolution is RegTech, a phrase coined as recently as 2015 by the UK’s Financial Conduct Authority (FCA). RegTech is a portmanteau word which describes how technology is being applied in the financial services sector to address the challenges associated with increased regulation and compliance requirements.

The need for RegTech has its antecedents in the 2008 global financial crisis. In the wake of the events that saw the world’s financial markets on the verge of a total collapse, governments and regulators were determined to try and make sure that such events could not happen again. New rules and regulations were introduced, and sanctions for non-compliance on banks and other financial institutions became much tougher. Compliance, previously a secondary, back-office function, began to play increasing a leading role in banking strategy and operations.

Faced with a raft of new regulatory measures and with the financial risk of non-compliance increasing exponentially, banks and other such financial institutions began to look to technology as a way of the meeting the new challenges they faced. At the same time, with the rise of new agile FinTech rivals starting to encroach on their traditional markets, these banks also looked to technology as a way of reducing the cost of their business processes, allowing them to compete with these newcomers.

Regulation applies equally to all organisations – pension funds, hedge funds, asset managers, insurance companies, as well as banks – irrespective of their size, scale or scope of operations. The volume and pace of regulation means that even the best-resourced firms are struggling to cope – which is where RegTech comes into the picture.

RegTech aims to drive down costs and improve processes by harnessing technology. It provides a way for institutions to respond to rapidly changing regulatory obligations more cheaply, effectively and accurately than they have ever managed before.

Many RegTech providers use the word agility to describe how their products use techniques like advanced analytics and assessment to teach systems how to “learn” and support both new and emerging regulation, with neural networks helping predict customer behaviour and fraud.

RegTech solutions tend to be cloud-based, which means that data is remotely stored, managed and backed-up.

Examples of RegTech tools include Tableau, Hadoop and Pentaho, which all are designed to organise vast amounts of data, and allow the creation of bespoke reporting which is flexible enough to meet the needs of both current and future regulatory requirements. Tableau, for example, is a visualisation tool which makes it easier to look at data in order to identify trends, and, from a compliance viewpoint, identify anomalies, even down to the individual customer transaction level. Hadoop is an open-source software platform for the distributed storage and processing of very large sets of data, whilst Pentaho is a data integration solution which aims to turn information into insights.

In the short-term, RegTech will help firms automate the more mundane compliance tasks, and reduce the operational risks associated with compliance and reporting requirements. However, longer-term its proponents hope it will empower compliance functions to make informed choices about the risks they face and how to manage and mitigate those risks.

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