RegTech and Its Impact on the Compliance Culture

By all accounts, regulatory technology, or RegTech, is the next big thing. According to content and research platform Let’s Talk Payments, the global demand for regulatory, compliance and governance software is poised to reach $118.7 billion circa 2020. But what exactly is RegTech, and how does it benefit businesses?

From 2007 to 2008, the world experienced one of the worst financial crises in recent times. Following the recession, banks in the United States had to pay over $160 billion in fines, penalties and settlements for their non-compliance of regulations. In the aftermath, there birthed an increase in ever-evolving regulations within the financial sector.

Keeping pace with regulations is not the only challenge the sector faces — macro factors also pose a threat to compliance. Over the years, security innovations have become more sophisticated, but so have hackers, and financial institutions remain susceptible to data breaches, cyber hacks, money laundering and other illicit activities.

Enters RegTech. Simply put, RegTech defines a group of companies and technologies that enable financial firms to comply with regulations efficiently. Rather than taking a reactive approach, RegTech monitors the macro environments and internal operations for any potential threats to financial security. By streamlining risk management and minimising the occurrence of regulatory issues, RegTech can help organisations reap immense cost savings by lowering consultation costs as well as avoiding hefty fines.

The technologies underpinning the RegTech ecosystem

In its report entitled “The RegTech Universe on the Rise”, Deloitte identified the following technologies as some of the core components supporting RegTech solutions: cloud computing; blockchain; smart contracts; Big Data; machine learning; and predicative analysis. Collectively, these technologies help simplify and standardise compliance processes through an automated mapping of regulatory risks and business procedures. Any manual and duplicate checks are reduced as well, saving organisations much time on what used to be a laborious task.

Open sharing leads to greater agility

Cloud computing and blockchain are a boon in this sharing economy. With cloud computing, open platforms and networks facilitate the sharing of data, format standards and common processes. Any regulatory changes or updates can be recorded easily.

Boasting a similar open concept, blockchain allows individual users to coordinate activities, interact with one another and even govern without the need for intermediaries. Authors of Blockchain Revolution Don and Alex Tapscott describe the blockchain as “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” Highly secure, the ledger can be distributed amongst interested parties, and while new transactions can be added to it, the existing data cannot be modified.

Augmenting security in contract law

Smart contracts are made possible thanks to blockchain technology. These computer protocols now help companies draft up and enforce contractual agreements. They can also execute transactions automatically.

A pre-emptive approach to ensuring compliance

Big Data has permeated every industry, and its applications in the compliance sector have far-reaching effects. Companies can use tools and techniques to analyse large amounts of information and uncover insights as well as trends that inform future decisions. When equipped with artificial intelligence, computers can not only learn from data but also continuously adapt their processes whenever new data is inputted. And with predictive analysis solutions, companies can identify suspicious activity patterns and abnormalities in data, such as unusually-large withdrawals of funds, and raise red flags on potential misconduct.

RegTech in action

According to data provider CB Insights, RegTech start-ups around the world have generated some $2.3 billion in investments since 2012. Interested in getting your slice of the pie and foraying into the RegTech industry? Get inspired by these names, who are bringing disruptive technologies to the table and addressing real industry demands.

• Based in London, CheckRecipient harnesses artificial-intelligence and machine-learning platforms to analyse data points and flag emails with unusual recipients or critical information. It ensures that important messages are not sent to the wrong users.

• ComplyAdvantage’s clever system curates data from multiple sources, from watch lists to international sanctions and media reports, to provide profiles on clients with a criminal risk. In turn, financial institutions can become more informed about whom they work with.

• Internal risks are a concern of many financial firms as well. With its behavioural analytics platform, RedOwl Analytics zeroes in on the threat of sensitive-information leakage as well as compromised accounts.

• Trulioo accesses 200 data sources around the world to provide instant identity, age and address verification. It boasts a repository of four billion user records across more than 60 countries, allowing companies to match to verified customer profiles in mere seconds.