RegTech combining Tech+Regulation

Every morning, you wake to the persistent knock of new technologies at your door. As they rightly say, "Newness hath an evanescent beauty." In this column, we will delve into the captivating world of Regulatory Technology, also known as RegTech, exploring its beauty and significance

Any new technology that emerges is here to stay, and regulatory technology has built a remarkable and strong foundation, especially in the financial world, establishing itself as an indispensable fixture in this realm for the long haul. The financial industry is often referred to as the 'it world', the happening one, where conversations primarily revolve around the big bucks. This industry's nature is dynamic, with constant activity happening. In such times, monitoring its hustle and bustle and managing its regulatory requirements is essential for effective management. Let’s explore this world of RegTech.

What is RegTech?

Before we dive into how RegTech works, its functions and more, we need to understand its premise. This technology incorporates digital tools that improve how institutions or organisations manage their increasing regulatory compliance commitments. The primary goal of RegTech is to monitor, report and ensure compliance. It predominantly utilises AI, machine learning (ML) and big data analytics. RegTech is implemented in various industries including finance, healthcare, and telecommunications. RegTech aims to enhance efficiency, reduce costs, and ensure compliance with regulatory requirements. RegTech incorporates tracking and reporting, regulatory monitoring, regulatory risk assessments, compliance monitoring, Know Your Customer (KYC) monitoring, anti money laundering monitoring, aggregation and transaction reporting.

The beginning

In 2015, the term "RegTech" was used for the first time by the UK's Financial Conduct Authority (FCA). However, though fairly new, the seeds of RegTech were sown in the early 2000s. Technology is something everyone eagerly adopts because if they don't, they risk becoming obsolete. To refrain from being outdated, financial institutions began incorporating technologies to meet their regulatory reporting needs. This is when new software emerged that automated compliance processes. Gravity rules apply to everyone and everything - what goes up must come down. After a great high, in 2008, the financial sector felt the whammy of crisis.

Never-ending challenges

Regulatory compliance, risk management, data management—you name it, and the industry was facing that challenge. During this chaos, the banking system was in turmoil, facing one of its biggest problems since the Great Depression. Most banks were in trouble, causing an economic mess. To set things straight, the government came up with some rules, one of which was the Dodd-Frank Act. A lot was happening—new rules, new technology—so much to comply with. Hence, banks and other financial companies rushed to set up new ways of working. Furthermore, to make things easier, they taught their employees how to follow these new rules.

Innovations and more

Cut to 2010, that time saw a new era, the rise of AI. Other technologies like ML, deep learning, and a few others started improving. As the government rules were a tad bit complicated, these new technologies made it easier to follow them. Soon, there was a spark of innovation in the regulatory landscape, thanks to the General Data Protection Regulation (GDPR) and the Dodd-Frank Act. From being a niche set of tools, it quickly became an integral part of financial institutes. Soon, it expanded beyond the financial sector to industries like healthcare and energy. Since then, there was no looking back. This realm now includes cybersecurity, fraud detection, and identity verification. In 2023, the worldwide RegTech market reached a value of USD 12.82 billion. It is expected to grow to USD 15.80 billion this year and to USD 85.92 billion by 2032.

This is how RegTech works

RegTech makes use of various technologies at every level to streamline operations. Considering the vast amount of data this industry generates, RegTech's first step is to gather it properly from multiple sources and bodies. Post-data collection, the aggregation process takes place. Once the data is collected, the obvious step is to analyse it by segregation. While this takes place, RegTech makes use of technologies like ML and natural language processing, and others which are applied to the data. This step identifies patterns, trends, and risks. This step is quite important for the organisation, as they understand their compliance status and identify areas of concern.

In all fairness, RegTech is a company's true best friend. They are also like smart helpers who understand all the company's obligations to be followed. With that, they keep a close eye on all the changing trends and rules, and ensure that the company is aligned with them. If something goes off track, it brings to notice that it has to be fixed—making this stage of rule mapping and compliance monitoring a genuine friend of the company.

RegTech automates many tasks, reducing the need for manual labour and other operational costs. By minimising human errors in data entry, analysis, and reporting, RegTech ensures highly accurate outcomes

DODD-FRANK ACT

Enacted in 2010 in the US, the Dodd-Frank Act is formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is named after its sponsors, Senator Christopher Dodd and Representative Barney Frank. It was implemented after the financial fiasco of 2008 to prevent future crises. This Act enforced transparency, and accountability, and subjected banks to more stringent regulations.

GENERAL DATA PROTECTION REGULATION (GDPR)

This Regulation lays down rules relating to the protection of natural persons with regard to the processing of personal data and rules relating to the free movement of personal data. The GDPR will levy harsh fines against those who violate its privacy and security standards, with penalties reaching into the tens of millions of euros.

The smart helper

Following the tagline of being the smart helper, RegTech solutions help in automating boring tasks like data entry, creating documents, making reports, etc. This reduces the load on the employees and ensures that there are no mistakes.

The organisations are answerable to the government, which means they will have to send all the detailed reports to them. And, RegTech ensures that Audit trail and Reporting are done to the point, ensuring all the rules are followed.

RegTech understands the trends and changes, as they are smart, they constantly monitor them. They offer compliance capabilities as per the changing trends. They are proactive, insightful and diligent.

Benefits of RegTech for financial institutes:

RegTech automates many tasks, reducing the need for manual labour and other operational costs. By minimising human errors in data entry, analysis and reporting, RegTech ensures highly accurate outcomes. Automation makes processes accurate and more efficient, allowing organisations to focus on other business activities. With its foresight, financial institutions can quickly respond to risks and manage them effectively, maintaining compliance and reducing risk exposure. RegTech enables companies to stay ahead of regulatory requirements, demonstrating commitment to compliance and giving them a significant edge over others.