Financial Markets: Embracing RegTech

TABB Group

A wave of technology innovation is fundamentally transforming enterprise workflow across industries. Regulatory compliance solutions which aim to be merely dependable and robust are no longer enough. Change is constant and fast in the financial services industry — whether from regulation, the political climate, business models, workflows or market structure. As data volumes grow exponentially, human hypothesis-driven analytics struggle to keep pace. Financial institutions are looking to advanced technology solutions to generate internal efficiencies and alpha.

The largest financial institutions can spend over $1 billion a year on regulatory compliance and controls while the average financial institution dedicates 10-15 percent of its staff to this area. Not surprisingly then, the industry is looking to reduce costs and avoid duplication of data and effort by turning to enterprise-wide solutions that leverage the latest technologies and approaches. Compliance solutions with siloed approaches along geographic, asset or business lines are no longer viable. There is also a growing recognition that an agile, adaptable approach to compliance not only supports today’s regulatory requirements but positions firms to handle change and extract more value from capital tomorrow — whether that capital is human or financial.

Several factors have contributed to making legacy approaches to regulatory compliance unviable:

  • An avalanche of new regulations in the aftermath of the global financial crisis
  • Increasing scrutiny by global regulators
  • Mandated increase in capital requirements, which has negatively impacted the industry, with restrictions on leverage starving banks and markets
  • Embrace of multi-asset, multi-regional investment strategies
  • Move toward globalized compliance approaches
  • A convergence of technology innovation (e.g., public cloud, advanced analytics, artificial intelligence)

Using advanced financial technology (FinTech) to solve regulatory compliance, risk management and surveillance challenges is known as RegTech. Though still relatively new, venture capital funding to RegTech start-ups totalled about $2.3 billion from 2012-2016, as tracked by CB Insights. Solution providers have capitalized on the view that RegTech offers financial services firms significant opportunities to save money, better leverage capital and build a competitive advantage. Recent technology advances mean that highly sophisticated data analytics and visualization techniques are within the grasp of any firm.

RegTech offers many benefits, but implementing it on an enterprise-wide basis requires commitment and support from senior management. Compliance officers are not ideally placed to be the catalysts of change. The mandate to move to enterprise-based solutions must come from the top, as it requires significant investment and technology integration. The biggest obstacles to RegTech transformation often center around the inertia of an enterprise accustomed, and often incentivized, to work in silos. Risk management and trade analysis mean little if they occur in silos; firms that cannot monitor across their enterprise in a holistic way will fall foul of regulatory authorities.

Technology building blocks exist to create an agile and flexible compliance platform to support today’s and tomorrow’s regulatory requirements. The RegTech ecosystem of regulators, professional services firms, vendors, utilities and leading edge financial institutions is growing. While regulations pose challenges for institutions, RegTech offers opportunities.

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