The core concept behind RegTech is nothing new. Technology aimed at helping organizations streamline specific regulatory obligations has been around since the turn of the century.
The difference now is that the sector has begun to consolidate itself at an increasingly rapid rate with demand from banks for more sophisticated solutions soaring.
RegTech really started to take root in 2016 as financial institutions felt the pressure to adapt to a new economic landscape. In the wake of the 2008 Financial Crisis, regulators across the globe had woken up to the need to become increasingly strict in the way that they policed certain sectors of the economy.
In order to let it be known that attitudes had changed, a new raft of legislation was introduced and fines became larger and increasingly common.
The scale of the obstacle faced by organizations is clear when we take a look at the fines issued by one regulator, in one country.
The UK’s Financial Conduct Authority (FCA) handed out a total of £229,515,303 in fines during the calendar year of 2017 with Deutsche Bank suffering a single hit of over £163,000,000.
With firms committing more time and resources to compliance in order to avoid the gargantuan penalties, a flourishing RegTech sector has emerged, filled with companies aiming to tackle specific areas of corporate governance, compliance and risk management.
The RegTech cause has yet to be taken up by a major multinational and the sector has been typically characterised by smaller players offering niche solutions.
The problem this creates is that the divided nature of multiple solutions fails to adapt to the integrated reality of regulatory compliance. A niche solution may be ideal within its specific field but if it is unable to communicate with the tools used by other departments then it leaves a considerable gap that must be filled manually.
The burning question for the RegTech sector is therefore how to implement a technological solution that can unite the distinct fields such as risk management and due diligence. Only with an advanced level of integration between different RegTech solutions is it possible to remove a significant amount of the burden that is placed on organizations in the modern economy.
When we consider that according to recent surveys, between only 10-15% of companies have implemented a RegTech solution, it is clear that the market remains relatively untapped.
There are multiple reasons why this may be. The first is a lack of knowledge of the sector. The second is that is that the current range of solutions isn’t offering a transformative enough level of change to attract a wider array of clients.
The sector as a whole, therefore, sits on the cusp of its watershed moment.
So where do we go from here?
There are two possible routes that will become commonplace within the RegTech sector. The first is that we will start to see a growing number of strategic partnerships forming between different solutions providers in order to provide integrations to their client bases.
The second is that we begin to see more RegTech solutions providers looking to widen the scope and develop platforms that take a more holistic approach to compliance.
The creation of an Integrated Regulatory Management (IRM) Platform is something that would transform the compliance industry in the same way that CRM systems such as Salesforce have been able to revolutionise client interaction in the marketing and sales processes. The ability to provide a considerable return on investment for firms that were willing to invest in taking the technological leap whilst also providing a new level of control.
So what is an IRM Platform?
As mentioned above, an IRM platform is a type of software that serves to unite the distinct departments that are classified under the umbrella term of compliance, bringing together teams whose work is highly interconnected.
The sophisticated levels of automation provided by such a platform are crucial in helping to improve efficiency in the use of times and costs within compliance, whilst vastly cutting down the margin of error.
An example of how an IRM system can help to optimise day to day compliance processes can be seen within the integrations between the different modules of Boards & Committees and Due Diligence within the HETIKUS platform.
Automating the process of transferring due diligence cases that have been red-flagged to the relevant decision-making committee or board, helps to ensure that financial institutions are always able to stay on top of all of their regulatory requirements.
The need to be highly efficient when reporting suspicious accounts was most recently highlighted in the 2018 ING/VimpelCom case in which the Dutch bank was caught out as having failed to identify (as well as swiftly report) that accounts held by international clients from Uzbekistan and Curacao were being used for large-scale money laundering.
When ING finally arrived at a settlement with prosecutors in the Netherlands, the resulting fine totalled an astonishing €775 million.
In the resulting backlash with the bank having suffered serious damage to its reputation, ING’s CEO, Ralph Hamers reaffirmed the organisation’s commitment by tripling the size of the team handling due diligence to 450 members of staff.
Although this served to stabilise the situation, this is a theme that is too prominent within the world of compliance, committing resources only once a crisis has struck. It has, therefore, become obvious that companies (especially financial institutions) must start to take a more intelligent approach to the way in which they invest in compliance.
An IRM can cut out a considerable amount of manual work and ensure that potential issues are quickly identified and brought to the fore, meaning that they are always dealt with before they start to pose genuine regulatory threat.
The value such technology can offer to companies such as ING is immense which is why it is highly likely that the market will start to move towards a trend in which RegTech solutions providers start to aim for a more ambitious multi-faceted approach.
So what are the problems in bringing such a solution to the market?
The sensitive nature of the areas touched by RegTech means that the procurement processes and sales cycle can become particularly long. This already a reality for companies tackling niche areas of regulation as they have to wait for security and IT approvals in order for their solution to be implemented. This hurdle becomes increasingly challenging in the case of an IRM system as it applies major changes across all areas of compliance within an organization.
Digital transformation at any level can be problematic but completely changing the systems and work processes of an entire section of the financial institution requires strict commitment during the transition phase.
Whilst there is clear evidence that the compliance sector will continue to shift towards more technological solutions, the uptake of such change could be slower as firms carry out an in-depth analysis of exactly how RegTech fits in with their structure and the adjustments that are necessary to make a seamless switch with minimum disruption.
Further to this, as Price Waterhouse Cooper’s FinTech lead, Henri Arslanian, points out, “a RegTech system is only as good as the data with which it is provided”. Therefore, the implementation of such a solution requires a significant commitment to reap the full benefits.
The rise of RegTech over the past couple of years has hailed a significant change within the world of compliance. As technology continues to reduce the margin of error, as well as time and costs across a wide array of areas, we can rest assured that this is a trend that will only continue to consolidate itself over the near future.
Whilst the market remains relatively divided with small players focussing on highly specialised areas, the next step logical step is for solutions providers to take on the ambitious goal of developing systems that can be classified within the category of IRM. This is the ultimate ambition of the HETIKUS project.
As the amount of regulation continues to grow and the stance of regulators becomes stricter, the market conditions strongly indicate that such a solution is becoming more and more necessary to overcome the new obstacles that companies (especially financial institutions) are facing.
It is for this reason that we see that companies such as BBVA and Deloitte are taking an active role in trying to promote and foster innovation within the RegTech sector.
We believe that the first company that is able to successfully create a fully integrated regulatory platform, uniting the work of multiple compliance departments, will come to dominate the RegTech market in a way that no other company has yet been able to achieve.