• Eirini Efstathiou

Regtech: How technology is transforming compliance

There is no doubt that technology has been transforming all processes internally, as well as all product delivery externally. One recent development is regulatory technology, which uses emerging technologies and tools to facilitate and enhance regulatory processes and legal compliance. The Regtech market is projected to reach a value of £2.8 billion by 2025, introducing agility within the finance sector and aiding in operational challenges, including the understanding and management of risk. This article will examine where Regtech is currently employed and how it is transforming the world of compliance for institutions and businesses through automation.

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The 2008 financial crisis prompted regulatory changes across the world, which led to an upscaling in compliance spending for financial institutions, to meet new demand. Banks like JPMorgan Chase & Co and HSBC, have been spending billions on human capital and upscaling systems, to fix risk and compliance issues flagged by regulatory investigations. Financial institutions are now turning towards ways to automate new compliance obligations and decrease the added recurring costs created post-crisis. Regtech solutions have recently been the answer to these questions, driven by the demand for the cost benefit that they provide.

Regtech: the basics

While Fintech involves employing technology in the financial services (FS) industry on the customer engagement side of services – as previously discussed in this article – regulatory technology, widely referred to as Regtech, takes a more niche angle within the umbrella term 'XYZ-tech'. Regtech helps address the operational challenges constantly faced by firms when it comes to regulation; for new regulation, this is in the form of understanding, implementing and embedding new requirements in operations, while for existing legislation, the challenges are in the form of constant improvement in the streamlining of internal processes to improve performance and cut down costs.

Technology has unlocked a new resource for firms of all sizes. Regtech envisions the use of technology in the Regulatory space, bringing with it 4 key characteristics: (1) Agility; (2) Speed; (3) Integration; (4) Analytics. These key characteristics are all connected through one resource: data. Regtech involves the use of analytic tools to apply intelligent systems on existing data sets, unlocking new potential by using the same data for different purposes, and representing it in new beneficial forms. In the Regulatory space, this is particularly useful in the process of interpreting regulation, defining how compliance will be managed, and bridging new ways in automating reporting.

Regtech is transforming compliance by performing functions such as anticipating potential issues with regulations and detecting non-compliant business conduct, which can, in turn, help businesses mitigate risk before regulators do. The FS sector heavily relies on legacy-based systems, to which Regtech introduces new capabilities designed to leverage the existing legacy systems and data, to produce regulatory data and reporting in a cost-effective, flexible, and timely manner.

Tools introduced by Regtech include: (1) Compliance universe tools; (2) Management Information; (3) Transaction reporting; (4) Activity monitoring [1].

Regtech in the finance industry

Regtech has gained traction in industries such as Life Sciences, Pharma, Oil and Gas, and Finance. The Finance industry is one of the most fast-paced industries, and hence the industry which has faced the most distrust in the past few decades. As a result, new regulations are introduced at a pace of equal measure, in order to keep up with the industry’s own pace.

In the 1990s and early 2000s, institutions first encountered an increase in regulatory challenges as a result of globalisation. This led to the manifestation of the Basel I and II international banking regulations, whose aim was to level the international regulation field with uniform rules and guidelines, including the introduction of disclosure requirements.

In the late 2000s, regulator overconfidence, which led to heavy reliance on the Basel II regulations, unfolded into the great financial crisis of 2008. False reliance on internal quantitative risk management systems exposed how institutions were underestimating both the risk of losses on their assets, and exposure to the failure of others.

Regulators retaliated by drastically introducing complex regulations, which increased compliance costs and regulatory fines. One of the biggest challenges for financial institutions today is remaining updated when it comes to new regulations. Such new regulations demand human capital to address compliance issues, and with the increasing pressure to cut costs, institutions have turned to Regtech solutions to alleviate some of the regulatory pressures.

Regulations such as Basel III and MiFID II introduced a set of reforms designed to mitigate risk within the international banking sector, addressing the issues brought into the light following the great crisis and ensuring the maintenance of proper leverage ratios and reserve capital. Regtech solutions have been particularly useful in addressing the need for liquidity in the avoidance of a liquidity dry-up, as well as digitising regulations to remove regulatory ambiguity. Solutions through the use of big data are being considered for the management of AML (Anti-Money Laundering), and KYC (Know Your Client) information, which are vital in regards to 'suspicious transactions' reports.

The mass digitisation of systems, accelerated even more by the Covid-19 outbreak, has brought with it a large-scale shift towards a data-resourced industry. Nonetheless, such an industry is also inevitably accompanied by a rising threat of theft and fraud. As such, cybersecurity also currently represents one of the most pressing issues faced by the FS industry, indicating that the introduction of new regulations will not be decelerating any time soon.

Recent developments: Bank of England paper

The Bank of England (BoE) recently published a paper discussing the transformation of data collection within the UK financial sector. The paper initially declined the proposed capital reliefs on software investments, which have been demanded by banks in order to invest in IT and “defend themselves from Fintechs and compete with Big Tech and American banks” [2].

Such capital relief has been recently introduced within the EU through its Capital Requirements Regulation (CRR2), while US banks are said to be benefitting from similarly favourable capital treatment, supporting them in their competition with technology groups including Fintech startups. The CRR2 aims to level the playing field by recognising that software is becoming an important asset for banks and allowing banks capital relief for developing their own software, or acquiring a FinTech firm, to help in their efforts of upscaling in the digitisation of systems.

In this case, capital relief relates to whether an asset should be considered when calculating the Common Equity Tier 1 capital (CET1). CET1 was one of the standards introduced by Basel III, which compares a bank's assets with its capital to determine whether it can withstand the test of a crisis. There is a regulatory minimum for CET1, which must be met, otherwise FS institutions face the risk of being overtaken or shut down by regulators. With the introduction of this relief, institutions can now factor in software investment as an 'asset' and meet the regulatory minimum.

Turning to the UK, the pressure for the UK to be granted 'equivalence' status from the EU has been increasing, especially when it comes to the finance sector, in order for the City of London to regain significant access to European markets. Nonetheless, hopes for equivalence have been fading; BoE looks to toughen rules for British banks versus their European rivals. In contrast to the EU’s CRR2, the BoE said in its paper that it had “found no credible evidence that software assets can absorb losses effectively in stress”, which showcases the lasting effects of the crisis as mentioned above and the importance of maintaining adequate capital reserves.


It is unclear whether the BoE paper has the potential to set-back the ongoing integration of Regtech systems when the financial disruption brought by Covid-19 is coined in to the equation. While firms were forced to massively digitise systems to keep their businesses floating, they are now asking for reliefs in order to upscale technology and compete with tech firms.

From the digitisation of money to the monetisation of data, the future of Regtech looks bright. The UK regulatory environment and the FCA have both been described as ‘tough’, but also supportive in equal measure, when it comes to technology and innovation. As it stands, FS institutions will have to rely on leveraging existing technology investment, unless overheads allow for gradual integration of Regtech solutions, or invest in their human capital and cross-train them internally.


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