business, business development, data strategy, digital approach, financial services industry, Regulation

Regtech firms look to help shoulder compliance demands

As regulators globally continue to demand that firms strengthen their risk management systems, regtech entrepreneurs see technology as the answer to rising compliance costs and an opportunity to boost trust with clients. Regulated entities support their ambitions, but the slow pace of adoption is a concern.

The global wave of regulation is expected to continue

Key insights

  • As regulators demand enhanced systems to manage risk, regtechs see technology as a way of rebuilding trust in client relationships
  • Financial services firms are receptive to regtechs but long procurement lead-times are seen as impeding the development of the sector
  • The liberation of customer data with the advent of open banking may offer a boost for regtechs through increased collaboration

Where fintech is the intersection between finance and technology, regtech focuses on technologies that facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.1 Increasing levels of regulation and the rise of data-driven technologies have fostered the emergence of specialist regtech firms developing compliance solutions that promise to reduce the cost, time, and resources devoted to address regulatory pain points.

Financial services firms and other regulated entities have had to deal with a wave of regulatory obligations in recent years, with those operating in the European Union contending with the introduction of the second Markets in Financial Instruments Directive (MiFID II), the Payment Services Directive (PSD2), and the General Data Protection Regulation (GDPR) in 2018 alone. The weight and pace of regulation is not expected to ease significantly as the roll out of new open banking and data protection regimes in multiple jurisdictions is expected to result in regulators introducing more robust systems to manage misconduct risk.2

Australian regtechs seek to bridge the trust deficit in the post-Royal Commission landscape

The findings of Australia’s Royal Commission inquiry into banking, superannuation, and financial services industry misconduct shone a spotlight on the importance of trust in client relationships and how it can be eroded through porous risk management and outdated technology. The Royal Commission’s final report signalled a broader remit for the Australian Prudential Regulation Authority, the financial sector watchdog, to monitor misconduct, culture, and other non-financial risks. Technology is inevitably going to play an important role in how the industry responds to the new landscape, according to panellists at a recent Financial Services Council’s Technology Series Workshop in Sydney, which focused on regtech.

“In order to deliver what the community really expects, it’s about trust. That means trust and integrity through all of the processes we have, and that will undoubtedly require automation,” said panellist Lisa Schutz, a director of Australia’s RegTech Association and CEO of Verifier, an Australian-based consumer-driven data sharing platform.

Where fintech is the intersection between finance and technology, regtech focuses on technologies that facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities

Australia’s regtech sector has grown rapidly over the last two years as the adoption of artificial intelligence continues to gather pace in financial services. While automation and advanced analytics have been deployed in capital allocation, credit assessment, trading, and other areas, financial institutions are also eager to employ machine learning to improve regulatory compliance and monitor cultural risk concerns among employees.

Regtechs are battling procurement barriers

The demand has sparked a proliferation of boutique start-ups offering solutions to specific compliance needs, as opposed to the traditional full-service solutions offered by incumbent global providers. However, the regtech sector’s growth is still tempered by typically long procurement lead-times that many banks and large financial institutions require for technology-based solutions. From the banks’ side, there is also some scepticism as to whether the regtechs have the sophistication to work inside their systems.

“If I’m a bank, the question might be, ‘How can I do my procurement a little differently for a start-up, a scale-up, or a small business that is not going to be able to afford that two-year procurement timeframe? Because at least 12 months of it is with lawyers and advisors to get through the procurement process,” said panellist Deborah Young, The RegTech Association CEO. “It’s about the acceleration of adoption. That’s really where the rubber hits the road.”

There have nonetheless been a number of tie-ups, with ‘Big Four’ banks Westpac and ANZ working with Sydney-based regtech Red Marker.3 American Express has also adopted the cloud-based technology platform of Australian regtech Simple KYC. Panelist Justin Burman, Director of Full Product Services (APAC) at RBC Investor & Treasury Services (RBC I&TS) said the barriers to entry for procuring regtechs were gradually coming down. “We’re engaging with those fintechs to create the micro-solutions that are being talked about where they really push us forward in terms of our capability,” he said. “I see the procurement timeframe coming down. While there is still a long way to go, certainly the leaders in our industry are embracing the technologies which are available.”

Open banking is expected to accelerate collaboration between banks and tech firms

While the financial services
industry is embracing the
power of data and
data-driven technology,
the advent of open banking
is expected to act as a
further impetus for the
regtech sector

Procurement challenges may also be eased with the involvement of established, larger tech and professional services firms that can act as a Trojan horse for smaller regtechs to access big clients. Microsoft recently joined the Regtech Association as it looks to boost its compliance offerings and become a bridge between banks and start-ups. “If a regtech firm can go into a bank having ticked four of the procurement boxes because they’re already on Microsoft’s technology, then that actually helps to immediately build trust with that organization,” said Regtech CEO Young.

While the financial services industry is embracing the power of data and data-driven technology, the advent of open banking is expected to act as a further impetus for the regtech sector. As the first part of a phased-in introduction of open banking, Australia’s major banks will have to make all consumer data related to credit card, deposit, and transaction accounts available from July 1, 2019, allowing clients to make easier comparisons, and shop around for service offerings better aligned to their needs.

The liberation of customer data is expected to create demand for regtech solutions and may drive more collaboration between financial institutions and the more nimble regtech firms. Schutz noted that “Open data is a consumer right not an obligation, and the consent process is going to require automation support, which will create demand for regtech solutions for consent engines and audit processes.”

RBC I&TS’ Burman concluded that “Banks and global asset managers need to adopt a universal approach to regulation. Collaborating to determine the best practice approach to respond to regulatory requirements will result in solutions that are more cost efficient to the end user. The challenge is to make use of the tools, services, and technologies at our disposal to make the provision of insightful, meaningful data more efficient, and more accessible.”


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