By Alexander Jones, International Banker
The rate at which the financial-services industry is evolving has rarely, if ever, been faster than it is today. As the industry continues to transform at breakneck speed, so, too, are the complexities—and sheer weight—of regulatory compliance. With financial institutions required to satisfy an ever-increasing number of demands from regulators, they are increasingly looking at the latest innovative solutions to meet those demands consistently. This is where regtech is proving a game-changer for the industry, delivering massive efficiency gains for firms in their quests to maintain high regulatory standards at all times.
Regtech is the use of technology, typically by financial institutions, to boost their regulatory compliance and risk-management capabilities. According to Deloitte, there were approximately 220 regulatory revisions for financial firms to monitor daily in 2020. And between 2009 and 2020, regulatory fines totalling some $345 billion were issued. Deloitte also noted that the volume of regulatory changes had increased by around 500 percent during this period. And then there’s the COVID-19 pandemic, which has dramatically transformed the daily lives of billions around the world and accelerated the development of new technologies to address this change. As such, regulators have introduced further rules and guidelines associated with this “new normal”.
Simply put, the financial-services industry urgently seeks help to keep pace with ever-expanding and evolving regulatory requirements issued by financial regulators. The last few years have thus seen a phenomenal rise in the number of regtech (regulatory technology) start-ups, with compliance-specialist firm Reciprocity recently counting more than 400 active regtech companies currently in operation, offering an array of compliance solutions that are bringing material cost and efficiency savings to organisations. Such solutions help financial institutions monitor regulatory changes, enhance risk management, produce automated reports, oversee all financial transactions and minimise the rate of false noncompliance alerts.
For instance, artificial intelligence (AI) and machine learning (ML) have become popular technologies used by regtech firms to help financial institutions automate everyday tasks that must be completed and filed for review by compliance departments. In particular, regtech firms are leveraging AI and ML for know-your-customer (KYC) and anti-money-laundering (AML) purposes, with the technology being used to verify customer identity and detect potentially fraudulent transactions.
Robotic process automation (RPA) and natural-language processing (NLP) are also leveraged heavily by regtech firms, with the technologies used to boost the efficiency and accuracy of repetitive manual tasks. “You can use RPA to improve the workflow to make the process more efficient and the quality,” stated Irene Liu, chief governance and reporting officer of UnionDigital Bank, while discussing regtech during a recent panel discussion hosted by Fintech News. “In the backend, there has been an increase in the use of AI… [in] web screening tools to discover new developments coming out before them being announced, as well as technology tools to look at taxonomy for reporting. And once the report has been generated, you also want to look at how you can extract insights. AI and NLP can be used to describe the differences between what you see today, compared to what you saw in the past.”
And given the reliance such technologies have on data, it means that data itself plays a crucial role in the advancements made by the regtech industry. During an August 2021 virtual session of Fintech Fireside Asia involving executives and officials from the Monetary Authority of Singapore (MAS), regtech provider Tookitaki, United Overseas Bank (UOB) and data-technology vendor InterSystems, the crucial importance of data in fuelling optimised regtech solutions was discussed at length. According to Alvinder Singh, deputy director of the MAS’s Financial Technology and Innovation Group, demand for regtech is closely related to the need to process large quantities of data. “Data is the key driver of this: one, is the large amount of data that’s being produced; and two, is the large amount of data that needs to be analysed. Humans alone cannot do this,” Alvinder stated. “The volume of data that needs to [be] synthetised…especially now that you’re using unstructured data and so on, this cannot only depend on humans.”
Indeed, Singapore and Hong Kong have been at the forefront of regtech development in recent years, with companies keen to establish a presence there and both of their respective financial regulators launching schemes to advance regtech development. The Monetary Authority of Singapore committed S$42 million (around US$35 million) in April 2021 to promote the adoption and integration of regtech solutions within financial institutions’ risk-management and compliance functions.
And the Hong Kong Monetary Authority (HKMA) launched the Regtech Knowledge Hub in late May to heighten awareness of regulatory compliance in fintech (financial technology)-related fields and encourage the sharing of expertise. The Hub forms part of HKMA’s two-year regtech-adoption roadmap, first launched in November 2020, and seeks to equip financial institutions and regtech firms with the opportunity to share experiences. “The promotion of RegTech is one the highlights of the HKMA’s wider support of fintech adoption in Hong Kong,” Etelka Bogardi, partner at Norton Rose Fulbright in Hong Kong, told Asia Business Law Journal, whilst citing the securing of internal budgets, ensuring system interoperability with legacy systems and products, and securing talent as key outstanding challenges facing those financial institutions seeking to adopt regtech in Hong Kong. “What has been particularly impressive is the close engagement by the HKMA with the industry and the continuous dissemination of practical and actionable information.”
However, Bogardi also warned that while remaining updated on the latest legal aspects of regtech development, lawyers are encountering two main challenges—staying on top of the myriad of developments in the space as well as the sheer number of regtech applications and providers; and gaining sufficient understanding of the underlying technologies to ensure they can be leveraged whilst remaining in compliance with the regulations. “It is likely that we will see a step-change in the use of RegTech solutions from quantitative to more qualitative use cases,” she added. “There is a big jump between RegTech such as optical character recognition to using artificial intelligence-powered systems for entire risk-management processes in banks. This will throw up interesting and challenging questions for regulatory and data-focused lawyers.”
Nonetheless, regtech is expected to continue growing prodigiously, so one can reasonably assume that such challenges will be addressed in due course. According to one market report published in April 2021 by Reportlinker.com, the global regtech market will reach $22.2 billion by 2027, from $6.2 billion in 2020 amidst the COVID-19 crisis. Growth in the space is thus pegged at a compound annual growth rate (CAGR) of 20.1 percent over the period 2020-2027. “The RegTech market in the US is estimated at US$1.8 Billion in the year 2020. China, the world’s second-largest economy, is forecast to reach a projected market size of US$3.8 Billion by the year 2027 trailing a CAGR of 19.4% over the analysis period 2020 to 2027,” the report noted. “Among the other noteworthy geographic markets are Japan and Canada, each forecast to grow at 18% and 17.4% respectively over the 2020-2027 period. Within Europe, Germany is forecast to grow at approximately 14.8% CAGR.”
Another report by Reports and Data published in September 2021 forecasts the global regtech market to reach a marginally lower $21.73 billion by 2027. The report sees the cloud-based deployment model as being the fastest grower during the period, at 22.3 percent. “RegTech firms deploy cloud computing to deliver their solutions using a SaaS (software as a service) deployment model,” according to the report. “These SaaS solutions help enterprises to comply with regulatory standards. Cloud computing decreases the cost for hardware and software, enabling data-storage more economical for RegTech companies.”
The report also noted that by application, risk and compliance management not only contributed to the largest market share in 2019 but will also likely grow quickly over the next few years, at a rate of 19.4 percent during the forecast period. “It helps in detecting the present state of compliance and forthcoming regulations,” according to the report. “Also, it helps in mitigating regulatory risk, simplifying the governance, assessment of risk exposure, and anticipation of future threats.”