May 9, 2016
Traditionally, dealing with regulations is a costly and a cumbersome affair. Regulatory documents are 100-plus pages long which aren't clearly legible. Furthermore, references to multiple documents including previous versions of legislations make them difficult to comprehend. The London-based HSBC bank spent $2.2 billion on regulation and compliance in the first nine months of 2015, up 33% year on year.
Globally, financial institutions in the US alone have paid more than $160 billion in files for non-compliance. The table below summarizes the fines paid by top financial institutions segmented by category. From the below table, it is clear that US mortgages, UK customer redress and managing sanctions are where most of the fines have been paid. One major reason why banks pay huge files is due to their inability to be agile when it comes to regulatory compliance. This is where Reg Techs, who are agile, come into the picture.
Globally, around $80 billion is spent on governance, risk and compliance, and the market is only expected to grow, reaching $120 billion in the next five years. Financial institutions’ spending on compliance has also increased as a percentage of total expenditure.
RegTechs offer the below capabilities which make them more attractive than traditional GRC solution providers:
Customer Due Diligence: Changes in regulations globally require financial institutions to collect and retain a large amount of customer personal information customized according to the region they operate in. In some cases, delivering reports to regulators end up being a Herculean task as more than 100-plus customer data points are analyzed. To overcome this difficulty, RegTechs are automating this process to an extent, thereby reducing the cost of managing compliance.
Enhanced Real-Time Verification: Digital channels have changed the way customers expect to interact with financial services firms. Carrying physical identity cards to authenticate oneself is soon going to be a thing of the past. RegTechs have also come up with online verification services which are expected to bring down the total cost of on-boarding and enhance customer experience.
Automation and Reporting Solutions: Automating the manual reporting process, and use of rule-based language and interface to build flexible reporting that can evolve with regulation is another key feature offered by emerging RegTech solutions providers.
RegTechs are able to provide value-added services primarily because of their big-data capabilities. Advanced analytics allows RegTechs to extract, analyze and aggregate all relevant information in near real time. Likewise, machine learning and predictive analytics are also being used for real-time risk/fraud identification through correlation of multiple sources of information. Furthermore, usage of advanced visualization tools for better decision-making augments its unique selling points. RegTech firms currently operating in the market play multiple roles such as content aggregators and providers, where each and every regulation is understood by an expert, then decoded and are laid out as simple rules. These firms provide access to simpler regulations through software. RegTech solutions are agile by nature due to the complexity and momentum of regulatory transitions. Traditionally, the technology was developed to be robust. However, RegTech can’t afford the luxury to deliver a solution for static requirements—it has to be a self-learning machine. Firms also support their clients in developing reports as per the jurisdiction’s requirement, thereby saving a lot of time and money where firms otherwise spend on regulatory experts.