How regulatory technology is transforming compliance

Financial institutions are turning to new technology to navigate increasingly complex global regulatory requirements.

Since the 2008 financial crisis, regulators across the globe have been understandably focused on minimising systemic risk. The intervening years have seen the introduction of swathes of new regulation, from stricter rules on data tracking and analysis to more comprehensive laws governing information management. For established companies and startups alike, there’s growing pressure to stay on top of regulatory obligations or face heavy fines.

In 2015, five of the world’s major banks were fined a total of $5.7 billion for regulatory non-compliance. It’s no surprise then that firms are turning to regulatory technologies – “regtech”– to help them navigate this challenging environment. Heralded as ‘the new fintech’ by Deloitte, the term refers to software tools that take advantage of the growth in market data and trading APIs to enable organisations to seamlessly comply with regulations.

“Compliance is typically painful, slow and expensive,” explains Charlie Delingpole, founder and CEO of ComplyAdvantage, a firm that specialises in creating compliance tools for the financial services sector. “Regtech helps companies speed up processes, reduce costs and manual workload, and gain richer, more reliable insights into risk.”

Rapid evolution

As the regulatory environment continues to evolve, many companies are struggling to cope with the increased level of monitoring it demands. 80 percent of respondents in PwC’s 2017 Global CEO Survey identified over-regulation as a threat to their organisations’ growth, placing it second only to uncertain economic conditions.

Ageing technology is often central to companies’ compliance concerns. Rather than being replaced outright, legacy systems have often been incrementally patched over the years to keep them up to date. At their worst, these arrangements are clunky, eye-wateringly expensive to run and inefficient.

“Legacy systems are old and creaking, and don’t interface well with new technology,” says Steve Hatton, co-founder of Trusek, a UK fintech firm which has developed a modular SaaS platform for the fintech industry. “These ‘sticking plaster solutions’ leave  financial organisations vulnerable, open to attack by fraudsters and money launderers and scrutiny from regulators. It’s not a happy situation.”

The new generation of regulatory technologies allow firms to monitor and analyse external risks more stringently than older systems. “Using artificial intelligence, software can be trained to address repeatable high-volume tasks, such as monitoring global data sources for changes and new insights, vastly more efficiently than any team of researchers,” says Delingpole.

Automating for the people

Automating the compliance process means software can be taught to learn from historical data and decisions, allowing low-level decision making to be passed to machines. That frees up talented employees to work on more strategic thinking rather than using their time on repetitive tasks.

As financial organisations continue to generate huge amounts of internal data, regtech tools can collate and analyse information more systematically than any individual. “The major benefit of regtech is the speed at which thousands of pieces of data can be analysed. That allows the vast majority of customers to be processed quickly, while also rapidly identifying those that need further investigation,” says John Davies, chairman of regtech firm Kompli-Global, which provides an enhanced customer due diligence service to financial firms.

Minimising risk

For accountants, regtech offers enormous potential as tools to assess and monitor clients’ exposure to risk. “More and more accounting firms are looking into how they can improve processes and maintain clear audit trails to protect themselves,” says Delingpole. “Companies struggle to understand where the risk is highest. For example, is my customer a politically exposed person? Is my customer in some way engaged with a sanctioned entity? Regtech can provide better answers to these types of questions and make decisions faster.”

One area where regtech tools have been particularly successful is in automating anti-money laundering and ‘know your customer’ checks. Through integrations with publicly available sanction lists and law enforcement watchlists, software can now perform comprehensive risk-screening at the click of a button.

With adoption spreading, companies are collaborating to make regtech solutions more efficient. “The future of regtech is all about leveraging users and the communities,” predicts Delingpole. “We will see companies building communities and networks of users who can use software to solve problems together.”

Regtech is still in its infancy but as corporate compliance demands become ever more data-intensive, it will be artificial intelligence that increasingly takes the strain. The question for the humans overseeing that process will be how to best harness its potential to stay ahead of the competition.

Jesse Onslow Norton is a writer, editor and communications consultant at Flibl. A former coder, his editorial work focuses on fintech, digital transformation, policy and regulation. His clients include corporations, governments, startups and SMEs from across the world. Follow him on Twitter @JesseOnslow.

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