The regtech space is in for a major shake-up, with the FCA‘s new Consumer Duty regulations coming into effect in two months. This presents an opportunity for financial institutions to adopt a new approach to compliance and regulation.
Throughout May, we’ll be examining the past and present states of regtech and compliance, highlighting lessons learned that will shape the future of the sector.
As with much of the financial industry, the pandemic completely uprooted what we knew digital limitations to be. The regtech field was no different. In 2021, the way the industry approached regtech was changed. This continued into 2022. But to what extent? We reached out to the industry to find out.
A lifeline for those working from home
For Allison Spagnolo, senior managing director, chief privacy officer at Guidepost Solutions, the compliance solutions provider, one of the biggest reasons for regtech’s success was its applicability in a remote work atmosphere. She told The Fintech Times: “Regtechs really exploded during the covid-19 pandemic because they were a useful tool for a workforce that suddenly found itself working from home.
“Regtechs were able to connect coworkers and customers on a scale we had not previously seen. As the technology improved and its applications broadened, financial institutions became more and more comfortable using regtech in their business-as-usual operations.
“For instance, where regtech was generally thought to be the domain of startups or fintechs, it has become widely adopted among more traditional financial institutions for critical functions. Such as, know your customer verification.
“The use of regtech is only going to become more widely applied throughout the financial industry. We should no longer view it as a tool for organisations that are willing to take a risk on new technologies.”
There is no end in sight for evolution
Sully Perella, senior manager at Schellman, a provider of attestation and compliance services, looks at how companies adapted to the initial wave of regtech’s development. However, he adds that they must continue to strive to adapt to evolving compliance and regulation rules: “Regtech standards have changed since 2021/2022 and are set to continue changing.
“In order to work within the emerging and changing technologies for cloud environments and mobile technologies, the standards are looking at how to approach security from a risk-based perspective. This shift requires that organisations take more time to understand their environment and the threat landscape. This is difficult. Nonetheless, it affords them the opportunity to leverage new security controls that new technologies provide.”
The main four areas of change
Elias Ghanem, global head of Capgemini Research Institute for Financial Services, an in-house think tank focused on digital, innovation, and technology issues, discusses the main areas which were impacted by the change in regtech: “Within the payments space, the regulation standards in 2021/22 aimed to create a safer, faster, more efficient global payments market. The focus was on modernising the industry and protecting users from any malicious occurrences. The regulations for 2022/23 are also concentrated on four key areas:
- Risk Reduction: The regulations aim to mitigate the challenges of experimental and established modes of payments making the process transparent for users. We have also seen regulations introduced to simplify SMB B2B transactions, such as digitizing supply and value chains and regulated B2B BNPL payment models.
- Standardisation: We are seeing a heightened focus on data usage and privacy. The accelerated adoption of ISO 20022 ensures faster cross-border payments, improves compliance and reduces transaction costs.
- Competition and Transparency: The primary focus continues to be on antimonopoly regulations and maintaining transparency in global transactions.
- Innovation: The focus back in 21/22 was around contactless payments, laying down foundations of a global payments interface and optimising open banking. In contrast, 2022/23 emphasises data sharing optimization and privacy. PSD3 is in consideration and aims to improve payment services, merge credit and non-credit transactions, improve open banking by improving APIs, and enhance data sharing with tertiary financial services institutions.”
An absolute necessity
Complying with regulations used to give you the edge over those who didn’t. However, this is no longer the case. Complying with regulations is now an absolute must explains Danny Gal, chief operations officer and chief revenue officer, Clausematch, the regtech: “The regtech market accounted for more than $8.2billion in 2022. It’s estimated to grow to $57.5billion by 2032, according to an analysis by Prophecy Market Insights.
“That’s largely because regulations only continue to grow. More focus is now on individual accountability and conduct and culture of a business. No longer is compliance a ‘tick-box’ practice, but companies are asked to prove how they are complying.
“Over the last few years, things have got more personal. As a result, individuals in organisations are now held accountable for their actions or lack of action.”