February 19, 2018
Regulations have always been a cumbersome affair for the banking and financial services industry. The global financial crisis exposed many loopholes in the existing regulatory risk assessment framework. However, since then, regulators have sprung into action and are constantly looking for ways to enhance their supervision of the industry, ensuring that a repeat of the 2008 crisis does not happen. As a result, several enhancements to the existing regulations (Basel II, MiFID II, Solvency II, PSD II) as well as newer regulations (GDPR, Dodd-Frank) have come into play. With these regulations, financial watchdogs have begun to fix the challenges in the financial regulatory framework, but this has, in turn, resulted in a significant cost burden on banks and FIs who spent close to $100 billion on compliance in 2016.
With every regulatory activity, there are hundreds and thousands of rule changes, which financial institutions need to be constantly aware of – any small mishap can cost them billions of dollars. However, the task is not as easy as it may sound – regulatory documents are thousands of pages long. It is challenging for banks and FIs, especially for the smaller ones who don’t have as many resources, to go through each and every one of them in a short span of time, identify the relevant change needs, and apply those changes in their processes to stay compliant.
Moreover, there have been strong mandates on how data needs to be managed. This is a compelling case for technology-driven innovation, where the use of ML and NLP can help banks scan these documents and extract relevant information which caters to their business, thus enabling them to take necessary steps to stay compliant. This is where RegTech comes in.
RegTech, defined as the use of new technologies to solve regulatory and compliance requirements more effectively and efficiently, has established a solid foundation within the FinTech ecosystem by coming up with solutions that targeted complex new regulations, litigation, and regulatory remediation areas faced by banks, and the overall reduction of costs of compliance. With the use of agile, cloud-based technologies, RegTech provides FIs help with their compliance needs. With the technology spend by banks and FIs expected to reach $80 billion by 2020, there is a huge opportunity for RegTech to scale and make a difference.
There has been a surge in the number of RegTech startups that provide a range of services, such as regulatory reporting solutions, data governance tools, transaction fraud monitoring, e-KYC, risk management, etc. There are some large technology providers who also offer comprehensive GRC solutions. Thus, banks and FIs have a plethora of choices available for transforming their governance, risk, and compliance functions. Moreover, the scope of RegTech spans over regulators as well. There are companies (e.g. Vizor) who offer new-age technology solutions to regulators, enabling them to enhance their supervisory functions and monitoring risk with a comprehensive view of the market.
All in all, RegTech is indeed the need of the hour in the ever-dynamic financial services industry, and it is here to stay.