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Insights and News /

12 July 2016

RegTech – Regulation and Innovation, a meeting of minds?

Baringa are supporting (1) financial services institutions to navigate current and emerging technologies designed to help meet their regulatory and compliance obligations, and (2) financial services and Fintech firms to help them understand the application of emerging ‘tech savvy’ regulations. In the first blog of our series, we introduce the concept of RegTech and what this means for financial services institutions. 

Since the financial crisis, financial institutions have been faced with an increasing number of rigorous and complex regulations to comply with, with regulatory costs becoming a significant part of an institution’s costs. Global financial institutions also face the added complexity of having to navigate differences between global and local regulatory requirements.

With the rapid growth in Fintech solutions emerging over the last five years, and financial institutions setting up innovative strategies, and actively investing in or adopting Fintech solutions across a number of areas in the organisation, would this not be a poignant time to look at innovating in the areas of regulation and compliance?

To quote the Financial Conduct Authority (FCA), “RegTech is thinking about solutions to issues that already sit squarely within the sphere of regulation” and “looking at ways of encouraging firms to be innovative with technology and helping them to help identify ways to integrate these new technologies into their business models”. RegTech essentially represents the suite of technology based solutions designed to enable firms to meet their regulatory and compliance obligations more effectively and robustly.

Although RegTech is a fairly new buzzword that has surfaced in the last year or so, financial technology providers have been supporting regulations since the time of the financial crisis. What has, however changed in recent years is the leap forward in technology supporting regulatory compliance, including wider adoption of cloud-based infrastructure (including more clarity from the regulators on the use of the cloud), big data analytics, an emerging trend on blockchain, and the regulators themselves looking to be more innovative, through use of new technologies and the potential for regulatory driven utilities.

With the FCA providing a platform to support that innovation through Project Innovate and its Innovation Hub (which has a range of initiatives including a regulatory sandbox designed to encourage technology providers and financial institutions to test products, business models, delivery mechanisms), financial institutions who embark on this innovation journey to re-assess current approaches to regulatory compliance, may stand to benefit in the immediate and longer term.

Financial institutions rely heavily on existing legacy systems and manual processes to meet regulatory requirements. However these systems and manual processes are often unable to meet the rigorous nature, frequency of reporting and monitoring (including real-time monitoring in some circumstances) expected by the regulators. By no means an exhaustive list, Compliance, Risk, Internal Audit, and Regulatory Reporting functions in financial services institutions stand to benefit from RegTech solutions in the areas of:  

  • Anti-Money Laundering (‘AML’) and Know Your Customer (‘KYC’)

  • transactional and prudential reporting requirements

  • robust and accurate management of internal audit records, operational risk requirements and controls

  • tracking of multiple regulatory requirements through regulatory management tools.

Regulations will continue to remain a key consideration in running a financial institution. Financial institutions who look to effectively manage their regulatory obligations, and leverage the support on innovation provided by the FCA, and the emerging range of solutions that the Fintech and RegTech industry has to offer, may stand to benefit, given the relentlessly competitive and cost driven environment that financial institutions face.