RegTech 101

The business landscape is changing. And as a result, the regulatory space is growing, becoming more comprehensive and complex. These heightened GRC obligations create a greater risk of non-compliance mistakes, and an increased need for more broad and agile compliance methodologies. 

RegTech is the answer.

The evolution of regulation

The regulatory environment is growing and changing globally. Between 2008 and 2016, regulatory changes increased by 500% and it’s estimated that over 600 individual regulations need to be understood and complied with by medium-sized organizations today. 

The World Economic Forum is calling our current environment the ‘Fourth Industrial Revolution’. New technologies are emerging and evolving, posing new challenges to regulatory agencies who strive to protect customers while embracing innovation. The digital world is becoming increasingly blurred, and regulators are working overtime to create agile legislation and effective rule setting. Organizations are also working overtime to implement processes and systems that allow them to monitor and respond to these regulatory changes. 

What is RegTech?
 

Regulatory technology, or RegTech, is an emerging technology that involves the implementation of digital tools and processes that improve the way organizations manage their increasing regulatory compliance commitments. Because it’s a new area of technology, its development embraces cutting-edge technological elements, including big data analytics, machine learning, blockchain (distributed ledger technology), the Internet of Things (IoT), artificial intelligence (AI) and more. 

RegTech itself offers a wide-range of capabilities, including:

• Regulatory monitoring
• Regulatory risk assessments
• Compliance monitoring 
• Know Your Customer monitoring
• Anti-money laundering monitoring
• Tracking and reporting
• Aggregation and transaction reporting

FinTech and RegTech

FinTech and RegTech are often considered to be one and the same, or RegTech as a subset of FinTech. But in fact, though they are similar, they have different focuses entirely. While FinTech is focused on innovative technologies and software for the financial services industry, RegTech is focused on innovative technologies that address the complex data and information requirements within the regulatory compliance space.

The need for regulatory modernization

RegTech is the answer to a driving need for regulatory compliance modernization. As the regulatory environment grows and changes, organizations are increasingly struggling to meet those requirements. The problem tends to be an issue of resources—they simply don’t have enough to manage the growing requirements. This lack of resources plays itself out in a number of ways:

1. Lack of personnel. Traditionally regulatory compliance has been very time intensive, and organizations often lack the human resources to meet those demands.
2. Licensing demands. Obtaining licenses and permits is unpredictable and time consuming. A World Bank study showed it took an average of 16 different procedures and 194 days to get the approvals needed to build a warehouse in South Asia. 
3. Reducing regulatory burdens. Every organization needs to determine which regulations apply to them, and which are perhaps unnecessary or cause unnecessary burdens. Making this determination is burdensome.
4. Reducing compliance costs. The cost of meeting regulatory requirements is one of the major resources used by organizations. In Australia in 2016, the economic cost of meeting these regulations was AUD$176 billion per year, which amounts to nearly AUD$20,000 per year per household.

The benefits of RegTech 

RegTech helps organizations stretch their resources to meet the requirements of the modern regulatory environment. But it also has many other benefits, including:

• Automating low-level manual work
• Lessening operational and delivery burdens
• Speeding up processes
• Augmenting transparency amid market shareholders and regulators
• Facilitating standardization across industries
• Increasing internal efficiencies
• Improving regulatory effectiveness
• Increasing accountability and accuracy
• Ensuring internal alignment within organizations
• Delivering better and faster decision making abilities and improving outcomes

Implementing a RegTech framework 

To achieve the benefits of RegTech and optimized outcomes, there are three aims organizations need to meet:

1. Increased internal efficiencies;
2. Improved regulatory effectiveness; and
3. Reduced regulatory compliance burden. 

1. Increasing internal efficiencies

Challenge: Regulatory compliance puts a heavy burden on organizations.

Solution: RegTech helps to automate manual tasks, such as processing paperwork and other labor-intensive activities. 

Challenge: Organizations need to understand where their highest regulatory risks may be coming from.

Solution: RegTech allows organizations to deploy risk analysis more effectively. Predictive analytics and machine learning help prioritize those resources as well.

Challenge: Analyzing large volumes of data takes a large amount of resources.

Solution: RegTech uses analytics and AI to identify valuable data and scrap information that is not helpful. It also allows for the clustering of information into groups to assess its relevance based on a large number of factors.
 

2. Improving regulatory effectiveness

Challenge: Organizations need to be able to anticipate disruptions in the regulatory market.

Solution: RegTech frameworks provide sensing and horizon-scanning capabilities that allow organizations to anticipate problems and sense potential disruptions. In this way industry shocks and changes won’t catch the organization by surprise. 

Challenge: Organizations struggle to ensure they’re managing potential fraud. 

Solution: AI and machine learning help identify patterns that could highlight fraud and material errors.

Challenge: Organizations struggle to react to compliance requirements quickly and flexibly.

Solution: RegTech incorporates the use of ‘nudges’, which strategically communicate obligations to the relevant stakeholders

3. Reducing regulatory compliance burden

Challenge: Organizations can struggle under the increasing regulatory compliance burden.

Solution: RegTech can quickly separate and organize cluttered and intertwined data sets through extract and transfer load technologies. It can create and dispatch automated reports quickly and use analytic tools to mine data sets for different regulatory insights and purposes.