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A LITTLE BROTHER OF FINTECH

Regtech is often referred to as a ‘little brother of fintech’. Regtech is not just about cost efficiency, regtech is automating manual tasks for compliance, and contributes hugely to overall operational efficiency as well as customer service.

It is a fact that the number of regtech startups grows every month, and each and every one of them promises some radically advanced solutions to existing problems or even brand-new value propositions. “The task now is to find those solutions that offer true added value and will pass the test of time,” as the recently released Deloitte’s research ‘The regtech universe on the rise’ mentions. Europe (with roughly 60 regtechs, including around 30 from the UK) and the USA (with roughly 20 regtechs) are the global centres of the rising regtech industry. Cities with the highest number of regtech startups include New York, London, and Silicon Valley, with Dublin and Luxembourg not so far behind. “We are going to explore an emerging trend in the finance ecosystem: regtech. First, regtech is a reality, much more than just a new buzzword but a real topic that we need to carefully look at and integrate into our business models. Regtech improves the way of regulation for the business. We can see 5 categories of regtech: reporting solutions, transaction monitoring, risk management, identity management and controls, and compliance solutions,” François-Kim Hugé, Partner of Deloitte, says.

Big challenge for a Regulator

The digitalisation is growing across nations. However, firms and governments are still failing to keep up with the technological progress. As European regulators believe tech is linked to society, Luxembourg Prime Minister Xavier Bettel notes that tech now represents a big challenge for any regulator. “We need to be active in the future, and as a country, we shouldn’t be afraid of tomorrow. We are working on developing the digital area, and we know the importance of digital skills to prepare the future and to bring the digitalisation to the next level. All our political decisions are integrated with a digital reflex.” Asian regulators also keep their fingers on the pulse. Naser Hakimi, Director General, IT of Central Bank of I.R. Iran-CBI, during his speech at ICO Spring Luxembourg, highlighted that Iran has made a lot of advancements in technology and regulation. “Our challenges and innovation are based on openbanking, peer-to-peer solutions and a strategy towards blockchain.” Spotlighting how to “tech your reg burden” into a competitive advantage with 2Gears, Bert Boerman, Co-founder and CEO, Governance.io, says: “People think that there is too much regulation, that regulation brings them nightmares. Our approach is to see the bigger picture but there are so many areas to control. The paradox? More data brings more need for control. But the aim of regulation is the investor’s protection. And tech can turn reg into an asset thanks to new insights into clients’ real-time collaboration, thanks to the access to structured data or documents, or thanks to the reduction of the costs”. As it is mentioned in a report entitled ‘Future of regtech for Regulators’ by Innovate Finance’s Transatlantic Policy Working Group (TPWG) and their Strategic Partner Hogan Lovells, it is very important for regulators to become the leaders of digital changes. That means to create an ecosystem, digital financial infrastructure, and to implement new rules and processes to encourage businesses and other stakeholders to get involved in regulation and compliance processes.

Source: Deloitte’s research ‘The regtech universe on the rise’

What is regtech about?

“Regtech can be explained as a symbiotic approach based on efficient collaboration between compliance teams and IT teams”, Luc Maquil, cofounder of KYC Tech, explains. Some experts such as Philip Treleaven, Professor and Director of the UK Financial Computing Centre at University College London, consider regtech a major catalyst for an efficient and effective finance industry. Mash Patel, CEO of Kurtosys, focuses on the close links between the new digital experience and regtech. “The next twenty years will be based on data. For example, the data produced and copied in one year reached 21 zettabytes. Data redefines entire sales, marketing and client servicing ecosystems. Data and content are currencies to firms. Digital is about to change the way we do things. And compliance is the guardian of the reputation of your firm because the reputation’s damage is incalculable and uncontrollable. The digital regtech is an opportunity to transform how you think about compliance”.

Nadia Manzari, Head of Innovation, Payments, Markets Infrastructures and Governance at CSSF explains that regtech makes online payments solutions easier, it changes the financial area and monitors the risks. The potential benefits of regtech by far outweigh simply reducing costs for businesses, Hussayn Kassai, CEO and Co-Founder of Onfido, believes. “Certainly, that’s one part of it: regtech such as our Identity Verification Platform, which automates KYC and AML processes, is proven to reduce the costs of compliance and manual review, increase conversion rates and reduce the risk of fraud. But, beyond that, regtech could be incredibly powerful in bridging the gap between regulators and businesses, while protecting the best interests of consumers. Regtech enables regulators to successfully implement and audit their compliance requirements and offers businesses a cost-effective way of meeting them. Most importantly, regtech makes these services available to those who, until now, have been excluded from our economy – the two billion unbanked people worldwide.” As a summary – regtech could be classified in the following three ways:

Verification and compliance – inconsistencies, standards, verifying the right data (data collection)

Enablement and efficiency – processing data in an automated way where possible (data processing)

Analysis – use of data (data analysis)

Experts underline some key regtech features. The key differentiator of regtech is agility, Evgeny Likhoded, ClauseMatch CEO and Founder, says. He believes regtech allows the use of advanced technologies to extract, transfer and load data sets that are cluttered and tangled, to create consumable information. This is done quickly and efficiently, giving businesses the agility to solve real-world problems and to stay ahead of the competition. “The cost of compliance in financial services has risen sharply over recent years. However, regtech brings more value than simply saving money. Companies using regulatory technology are adapting to new technologies and sophisticated data analytics to glean the information they need to make calculated decisions. This is critically important for senior managers in financial institutions who may be held personally liable for some cases of noncompliance. Regtech unleashes a much-needed resource: human capacity. Regtech is about automating manual tasks, by releasing compliance officers from administrative duties and developing their skills so they can feel a renewed sense of value and satisfaction in their roles. Regtech also brings extra convenience and visibility to the regulators, as they want the market to function in the best possible way. That is why the FCA encourages the adoption of new technologies.”

“Regtech unleashes a muchneeded resource: human capacity…”

Cost reduction is clearly a significant driver of regtech, and one of the major benefits that regtech can offer. However, the benefits of regtech are much more than reducing costs. “At its best, regtech deploys technology to reduce risk, flag up matters before they crystallise into problems and enables firms to reach conclusions that can aid their compliance programme, via sophisticated analysis of large datasets, or by monitoring of trader behaviour. Regtech solutions can also perform more mundane compliance tasks, thus freeing up human resource to focus on subtlety and nuance,” Jane Walshe, CEO and Co-Founder of Enforcd, explains.

A year of regtech

Most experts believe that 2017 year is the year of regtech. Very powerful factors speak in favour of this fact – from numerous reports by Big Four companies to the upcoming drastic regulatory changes.

“We’re living through a unique and unprecedented period of rapid regulatory change. For instance, Brexit in the UK and the new president of the US, Donald Trump, both challenge the legal systems of the two countries, tending to rewrite them. Moreover, there is a global trend. The number of regulatory changes a bank has to deal with daily has increased from 10 in 2004, to 185 this year (figures by TR). It becomes impossible to deal with this scale and pace of change without taking radical measures and embracing regulatory technology,” Evgeny Likhoded of ClauseMatch, explains.

On one hand, adoption of regtech is still provoking suspicions about the risks of new technology, and the fear of regtech being a threat to jobs of compliance officers and lawyers. The main regulatory barriers to innovation, as indicated by 54% of participants in a survey conducted by PwC, are data storage, privacy and protection. On the other hand, big new regulatory packages such as MiFID, GDPR and SFTR are coming into play over the next several months and many businesses are struggling to adjust to them. “They’re racing to get new compliance procedures into place, and many feel it might get out of control. This brings an understanding that a business can’t run successfully without adopting regulatory technology. And perhaps this kind of thinking is going to dominate in 2017,” Evgeny Likhoded of ClauseMatch says.

Philip Creed, Director and Head of regtech fscom, explains that the instability of the UK and US markets, with Brexit, and Trump’s “deregulation” promise, means that the regulatory environment is changing rapidly. “For financial services firms to keep with the pace of regulatory change they must employ specialists. In the EU, new regulation is coming thick and fast, the Forth Money Laundering Directive (4MLD), MiFID II, IFRS 9, PSD2 and GDPR will all affect financial services. Reflecting this, a recent Thomson Reuters survey revealed organisations plan to spend more time and money on compliance activities. As these companies seek to streamline processes such as Know Your Customer (KYC), we can expect to see a significant investment in regtech.”

Regtech is definitely on top of the agenda at the moment, Nasir Zubairi, CEO of the LHoFT, believes. “Regulatory related technologies ensure firms are safe and compliant while they innovate to keep up with changing customer behaviours and needs, while also helping to eradicate increasingly penalising overheads. To put it in other words, regtech is a bit like the ‘helmet a skier wears when racing down a black run’ – it effectively protects financial institutions while they move forward at speed.” Nasir Zubairi identifies the following opportunities and challenges of regtech:

Opportunities: Firstly, regtech solutions reduce the complexity and capacity-demands of compliance while allowing companies to quickly adapt to changes in regulations. Then, regtech helps companies to free up some capital to use to reduce the risks within their systems, and also to improve supervision via enhanced insights. There is quite a substantial demand from financial institutions to reduce regulatory overheads due to the squeeze on margins.

Challenges: Regtech solutions require in-depth knowledge of regulation and bank operations. Therefore, teams operating in this space need to have experienced finance specialists as well as compliance specialists on board. Likewise, firms operating in this space must understand that the sales cycle is typically a minimum of 6-9 months with a financial institution.

Benefits for consumers and companies

Regtech is helping customers to get better service and advice. It advances the protection of customers against many kinds of fraud, Evgeny Likhoded suggests. “The benefits that regtech bring to companies include cost savings, time efficiencies, risk reductions and increased opportunity prospects. With the help of regtech, companies can be safe in the knowledge that human errors are minimised. Innovative technologies can support firms to develop advanced data analytic capabilities including scenario analytics, trend and horizon scanning, which regulators deem to be important tools that could improve the quality of information.”

Regtech hugely improves the onboarding process. Wayne Johnson, CEO and Co-Founder of Encompass, notes, “For some customers this means they can be onboarded almost instantaneously. From the company’s perspective, they know exactly who they are onboarding.”

Susanne Chishti, CEO and Founder of FINTECHCircle, also considers consumer benefit – for instance the account opening process is faster. “The market overall benefits when market manipulation and insider dealing cases can be prevented via regtech innovation. Companies benefit as they have to fear regulatory sanction and reputational damage less if they have a well-designed compliance and conduct framework implemented in combination with effective automated controls.”

Regtech offers extraordinary potential to make compliance teams more effective, giving them insight, data, analysis and transparency on the behaviour, culture and conduct of their institution. Never before have they had such visibility and reporting certainty, Alex Viall, Head of Regulatory Intelligence, Behavox, explains. “Regtech liberates incredibly valuable and scarce resources (highly qualified compliance professionals) to be deployed more effectively.”

Regtech is fairly broad in coverage. Aside from the obvious reporting and KYC elements, it can also mean innovating the infrastructure, i.e. using technology to take a bigger step and drive tech renewal, Nasir Zubairi, concludes. “Indeed, institutions should use the regulatory and technology drivers of change to reassess how their IT-teams work. Rather than taking on large projects that take five to ten years to complete, continuous delivery would deliver value from day one – implementing IT-systems and infrastructure in the frame of knowing they will change again rather than implementing systems with the false belief they will last ten years.”

More expert thoughts and insights on regtech find here

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