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.
Earlier this week, The Fintech Times explored the latest standards and developments in regtech and the impact they have had. We now turn our attention to how the regtech space will continue to develop over 2023.
To help understand and explain exactly where the space is, and how it may, or may not, develop during the remainder of the year, we reached out to industry experts for their input.
‘Help banks and fintechs save time and money’
Robert Blaszczyk, head of strategic clients department at currency exchange fintech Conotoxia, explained which sectors regtech will continue to best support in 2023:
“Although regtech has a short history, it probably has significant potential and growth prospects. It is expanding with the increasingly widespread digitalisation of services (including financial services), the popularity of online transactions and growing competition in this market. According to standards applicable as early as 2021-2022, regtech is able to adapt regulations and legal frameworks on an ongoing basis for entities offering, for example, currency exchange, payments, online money transfers, accounts, payment card settlement, etc. This happens because it is based on new IT technologies, the cloud, artificial intelligence or blockchain: the decentralised and distributed database on which cryptocurrencies are based.
“In 2023, regtech companies will help banks and fintechs save time and money while reducing the risk of theft or the introduction of illicit funds into circulation. Without the support of regulatory technology and companies specialising in this field, screening transactions ordered by customers at banks and fintechs would prove to be, first of all, time-consuming but also tedious and costly. Regtech tools are and will be used daily to monitor transactions. In real-time, they can detect criminals’ endeavours, for example, related to so-called money laundering. After all, the technology identifies any abnormal activity.”
‘Patchy’ progress to continue in 2023
Rory Yates, SVP of corporate strategy at digital insurance platform EIS, suggests that 2023 may not prove to be the easiest time for regtech firms; unless they are able to adapt: “Using technology to streamline the regulatory process in financial services remains a fast-moving and fast-growing sector. The businesses that can capitalise on its advancement will have a distinct advantage.
“However, driven by a mixed bag of in-house solutions, core existing technologies driving business processes and regtech start-ups, progress has been patchy. As a recent FCA survey revealed across businesses of different sizes, the overall market has only remained ‘quite satisfied’.
“In 2023, we will see more of the same. Whilst 2020 data showed regtech getting decent investment, the market remains fragmented. In my opinion, to be vastly more successful, it will be reliant on foundational technology that makes integration easier.
“Regtechs need better interoperability or gain it from sitting on better platforms. I’ve even seen pleas for regtech businesses to mature far faster and offer more complete propositions that are easier to use. Personally, I’d embrace more guidance going into this sector, and something like a regtech certification or accreditation scheme would be helpful (as identified by Ron Kalifa).
“Generally, insurance is also a market that needs maturity on the buy side. However, even in my strategic role, I’d struggle to provide a regtech taxonomy that identifies the various fields of expertise and technologies that comprise the regtech capabilities insurers could benefit from outside specific areas like claims leakage or fraud prevention.”
‘Growth to continue throughout 2023 and beyond’
Leo Labeis, is the CEO of REGnosys, a collaborative low-code platform for regulatory reporting. Labeis explains the important role regtechs play – and how this could cause further investment growth: “Regtech has been one of the few areas of fintech to buck the downward trend in investment over the past twelve months, and we should expect this growth to continue throughout 2023 and beyond.
“This is because regtech solutions are not just a ‘nice to have’ – complying with regulations is a mission-critical part of businesses’ operations and is often beyond the reach of legacy technology. Against a backdrop of growing scrutiny from regulators, particularly in light of the recent banking failures which have shone a light on instances of poor risk management and reporting practices, regtech is likely to play an increasingly central role in helping financial institutions maintain the accuracy of regulatory disclosure and meet compliance requirements.
“In addition, many G20 regulatory reforms are also underway. Last year’s rewrite to the Commodity Futures Trading Commission’s swaps reporting rules (CFTC Rewrite) as well as upcoming changes to several Asia-Pacific reporting regimes and the European Markets Infrastructure Regulation Refit in 2024 and beyond are part of a global overhaul of G20 trade reporting rules. Over the coming year, more financial institutions will turn to regtech initiatives like digital regulatory reporting which can digitise the new requirements in a transparent, standardised and cost-effective way, helping them adapt to the changes.”
‘AI will be helpful for compliance professionals’
Steve Lamb, COO of B2B information services company Kyckr, comments on how the explosion of interest surrounding AI will also impact the regtech space: “There’s no way of escaping it – everyone is currently looking at the impact of AI on every industry. At Kyckr, we’re interested in analysing how criminals could utilise this technology and its effect on financial crime, but also what it could mean for the ongoing efforts within regtech to combat this. As 2023 unfolds, every organisation will need to have an AI strategy or, at the very least, consider how they use AI.
“Undoubtedly, AI will be helpful for compliance professionals in transaction monitoring, detecting suspicious activity, and spotting linkages between organisations and individuals. However, there is also significant risk in trusting ‘bet the company’ risk-decisions to AI models with opaque training data. Usage of AI should be considered in the context of proportionate use and proper governance – the risk of misuse is significant.”
‘The regtech space will continue to evolve and expand in 2023’
Andrea Maria Cosentino, is founder and host of Crypto Club at Rise by Barclays, the global fintech community. He is also founder and managing partner at Impact Fundry. Cosentino explains the main reasons behind why he believes the regtech space will continue to evolve and expand in 2023:
Increased adoption of regtech solutions
“As regulatory requirements continue to become more complex and data-driven, financial institutions and other regulated entities are likely to increasingly turn to regtech solutions to help them comply with these requirements. This could lead to a wider range of regtech solutions being developed and adopted, including those focused on areas such as anti-money laundering (AML) and Know Your Customer (KYC) compliance.”
Greater focus on data privacy and security
“With the rise of cyber threats and increased regulatory scrutiny around data privacy, regtech solutions will need to prioritise data security and privacy. This could involve the development of new tools and technologies to help protect sensitive data, as well as greater collaboration between regulators and regtech providers to ensure that privacy concerns are being addressed.”
Greater use of artificial intelligence and machine learning
“As the use of AI and machine learning becomes more widespread in financial services, these technologies are likely to play an increasingly important role in regtech. This could involve the development of new tools to help automate compliance processes, as well as the use of AI to identify and mitigate potential compliance risks.”
More collaboration between regulators and regtech providers
“To ensure that regtech solutions are effective in addressing regulatory challenges, there is likely to be increased collaboration between regulators and regtech providers. This could involve the sharing of data and best practices, as well as the development of common standards and frameworks for regtech solutions. A clear example of such developments has been the FCA customer duty regulation.”
‘AI and ML will continue to automate compliance processes’
Farnoush Mirmoeini, co-founder of onboarding and screening platform KYC Hub, also explains why AI will likely dominate the near future of regtech. Mirmoeini said: “As innovation continues in open banking, crypto, fintech and payments, criminals and fraudsters gain more opportunities to defraud users and launder proceeds of crimes in a much faster and more sophisticated manner.
“According to the survey done by the FCA, firms are interested in using regtech to automate manual processes, improve data quality, and enhance regulatory reporting, also firms want solutions that are customisable to their specific needs and also easily integrable into their system.
“For this reason, technology will dominate the changes: the use of AI/ML will continue to automate compliance processes, unbundling monolithic solutions and the use of application programming interfaces (APIs) to facilitate new risk detection applications and and rapid deploying of these new risk detection into their existing workflows and customer journeys without major IT investment and manual processing.
“One of the biggest components of a good compliance programme is access to up-to- date data that contains information about not just entities and individuals, but their connections and relationships. The industry also needs to adapt to deal with the risks posed by generative AI, both in terms of fraud detection and cybersecurity, as well as money laundering.”