Regulators are asking some tough questions, but RegTech can help financial services firms find the answers if they are willing to embrace new technology.
Banks and financial institutions face a challenging landscape. In a post-financial crash world, they are coming under intense regulatory scrutiny, but at the same time, they face a market which is becoming ever-more complicated and challenging. However, innovative RegTech could be the solution to their angst.
A threat and a solution
The RegTech Market is booming. Approximately £238million in venture capital was invested in the sector in the first quarter of 2017 alone. Its promise is to make compliance less expensive, complicated and time-consuming, and it comes in all shapes and forms.
Hedge Funds, for example, are employing AI algorithms to monitor a trader’s work, detect patterns and raise alarms if they do something out of character or which could breach regulations.
Sophisticated software, such as Enforcd, meanwhile, can collate vast amounts of regulatory and enforcement news and insight and provide an easy way for firms to share this information across an organisation.
Not only does RegTech reduce the time and effort involved with compliance, but it also significantly reduces the chances of a mistake being made.
Just on this basis, then, the case is compelling, but there is more.
Penalties for regulatory non-compliance have the potential to skyrocket during 2018, as demonstrated by the upward trend in the number of final notices served by the FCA since 2002:
Moreover, a report in 2016 warned that UK firms could face total fines of £122bn for data breaches with the arrival of GDPR and other new regulations. While a survey from Duff and Phelps suggests regulatory costs could more than double, with more than 89% of respondents saying their costs had increased.
RegTech, then, becomes a necessity for any financial services firm which wants to thrive in this challenging environment. However, this only represents the negative aspect of the return – namely the ability to minimise costs and avoid fines. Where it truly comes into its own is the ability to drive revenue, by opening up opportunities afforded by the digital economy.
The rise of technologies such as big data, cloud computing and artificial intelligence represents an enormous opportunity for financial services. They are being used to drive features such as sharing of information, the compilation of up to the minute reporting, predictive analysis, security and other more personalised services. Using big data and AI companies can improve their conduct and culture and make sure customers are treated fairly.
For all these benefits, though, many firms are held back. Financial services companies are one of the most heavily regulated sectors in the world and they are coming under a huge amount of scrutiny in every aspect of their business lives. So, while the new technology opens up possibilities, it can create an even bigger stream of information to manage. This means that to some, the technology represents a problem rather than a solution.
However, RegTech is still young and it is constantly improving to meet the growing regulatory demands that lie ahead. If financial services firms are bold enough to embrace RegTech now, then they will have the power to help shape it so that the emerging technology is best tailored to their needs.