Regtech: The rise of the machine

Published: February 2, 2018

With regulators worldwide placing more complex requirements on the financial services industry, the existing systems and processes used for compliance  and reporting are coming under scrutiny. Regtech companies are leveraging technologies that are helping to address this tricky landscape.

Since the financial crisis, regulators worldwide have introduced a plethora of both new and ongoing changes to regulations governing the financial services industry - all of which have added to the costs, burdens and complexities of ensuring compliance.

This has led to an increased focus on improving existing compliance procedures and the systems used – as well as the need to exploit new technologies in a move to reduce manual intervention, improve efficiency, and reduce risks.

Regtech companies are a new generation of small businesses exploiting the use of emerging technologies such as artificial intelligence (AI), robotics, open source and the cloud to provide specific regulatory compliance solutions, and are already actively making an impact.{mprestriction ids=“*”}

“There has been a huge extension of the interest in technology to support risk and compliance over the last twelve months,” says John R Liver, partner, Ernst & Young with responsibility for the firm’s EMEIA financial services regulatory compliance capability. 

Liver has seen a rapid rise in bank’s interest in regtech’s services and solutions and much of the movement is also being driven by regulators such as the UK’s Financial Conduct Authority (FCA). “Since the financial crisis, the level of change in regulation has been huge with a whole new range of regulations covering capital and liquidity, and this has now reached a very high watermark. However, there is a huge amount of work to be done to improve the capabilities required to achieve this.”

“AI in regtech has the power to deliver the next level of operational efficiency,” adds Simon Eacott, head of payments innovation and business development at NatWest, who points out that the use of AI in regtech offers the capability to sift through structured and unstructured data with little manual intervention to deliver ‘superior’ insights. “Coupled with a bank’s knowledge of their own customers, it will help reduce risk and maintain compliance. This benefits customers, providers and regulators alike.” 

Much of the hype surrounding this nascent sector is driven by cost savings. John Byrne, CEO of Corlytics, a regtech vendor specialising in regulatory risk intelligence, explains that smaller regtech company technologies represent a viable alternative to banks building their own systems internally to handle compliance. He explains that banks still prioritize the development of their own systems with the top global 25 banks estimated to spend upwards of US$25bn per annum.

“Many banks are looking for solutions to solve specific problems and this is something they can now buy into through this sector,” Byrne tells EMEA Finance.


Mountains to maintain
The challenges presented in regulatory compliance are accentuated by the fact that financial institutions have to meet new and ongoing regulatory requirements from multiple regulators, with global banks, in particular, now having to deal with about 140 different regulators worldwide.

Since 2009, 54,000 regulatory documents have been published from 130 different regulatory bodies in G20 countries alone.

And the breath of regulations is huge, ranging from prudential regulations such as Basel III and the European Market Infrastructure Regulation (EMIR), geared at ensuring banks’ sustainability and financial health, to those guarding against crime and criminal behaviour such as Know-Your-Customer (KYC), Anti-Money Laundering (AML) and cyber-crime. 

Banks are struggling to manage all the multiple, ongoing regulations emanating from different regulators worldwide, and are working to achieve more efficient and streamlined ways of effecting compliance.

Corlytics’ Byrne says, “Regtech is very much about change management – being able to monitor regulatory changes on an ongoing basis effectively. There is no need to do this manually any more – systems can do this for you.”

A serious challenge for banks is now best to manage and to gather all relevant data required for compliance and reporting, which is often held internally in silos, unconnected and requiring significant manual intervention to process. There is scope here for new tools and techniques leveraging emerging technologies. Developments in robotic process automation can, for example, create software that that can do the tasks involved in drawing data from disparate systems for a specific report. 

“Banks don’t necessarily hold data in the same cups to support reporting, and as a result manual intervention is required. One central system for systems is clearly needed and many organizations have focused on setting up central data warehouses to deal with this,” says Liver.

He believes that the use of robotics and machine learning techniques could provide an alternative, and even eliminate the need to create one central database. “They would benefit from a machine doing [what was once] previously manually-handled tasks for them.”

Corlytics’ Byrne says, “Regtech is very much about change management – being able to monitor regulatory changes on an ongoing basis effectively. There is no need to do this manually any more – systems can do this for you.”

With many banks now undergoing business transformation programmes that will see them embrace a new, wider wave of digital technologies, we can expect solutions that leverage AI and robotics. 

As with the fintech sector, regtechs recognise that their solutions must interface with existing bank systems. 

“Many financial institutions already have existing systems in place for regulatory reporting in relation to Basel III and MIFID II,” says Byrne. “We as a regtech vendor are now offering something that is quite radically different - but also must be able to work with other systems within a bank and leverage the investment that bank has made in its core systems.”


KYC and AML expanding acronyms
When it comes to regulatory compliance, the rules governing Know-Your-Customer (KYC) Anti-Money Laundering (AML) and sanctions screening are where many regulators are now introducing some of the most demanding and onerous requirements. They are now calling on financial institutions to collect a huge amount of information on all their counterparties - from their clients to their suppliers and counterparty banks - in terms of their identity and their business. 

Neela Das, head of innovation at Accuity, which offers data-enabled solutions to handle watchlist filtering and trade compliance, reports that the onus is on the executives: “Senior management are now personally liable for the decisions that are taken in relation to guarding against illegal transactions.“

Regtech companies are also expected to play a big role in transaction monitoring. Liver points out that, with the latest machine learning technologies, a robot can be taught to do this job – putting banks in an even stronger position to learn more about their clients’ business patterns and identify abnormalities in transactions, which may present a risk. 

“This way a bank is also put in a better position to understand other things about a customer – and gain a better understanding of the risks that customer presents,” he says.


RegTech to the rescue
Having to manage multiple regulators’ requirements for huge volumes of KYC data that needs to be sourced directly from corporate clients also presents issues. For corporate banking detailed KYC requirements mean that banks now have to provide much more information about their clients. Companies’ own information burdens have risen, because they have to inform multiple financial institutions creating more administrative work. 

Regtech solutions, which automate the checking and identity management process, are expected to make it easier and swifter to gather the required KYC information from corporate clients, and thereby improve and shorten the onboarding process.

“The fintech and regtech sector are not only going to reduce the exposure of banks but can also help them to introduce better banking processes,” says Byrne. 

A potential solution to ease reporting could be to provide banks with permission, and a system, that enables them to share KYC information on corporates in real-time, allowing companies to provide their KYC data once. “If a bank was sharing its own data – that may be a concern, but if it is client data, that is required for KYC purposes, then this is much lower risk,” says Liver. “This could help banks to get costs, which are coming under increased pressure, down.”


If you don’t know me by now…

The fourth Anti-Money Laundering (AML) Directive has also placed more stringent requirements on banks by requiring them to source ‘authoritative data’ on their clients and other counterparties such as their suppliers from independent sources. 

This means placing an increased reliance and onus on gathering data from official sources – such as commercial registers worldwide – rather than credit agencies, as has often been the case to date. 

“By relying on commercial registers as a source, banks can also better manage their risk,” says Russell Perry, founder and CEO of kompany. “The use of authoritative data from registers can also play a big role in helping banks meet new AML requirements in relation to identifying Ultimate Beneficial Ownership (UBO).”

Whenever a new customer joins a bank, several data points now need to be retrieved from different official sources, but this is a process that can be automated. 

Under the new AML directive, all Payment Services Providers (PSPs) are also now required to conduct business KYC checks through primary sources such as trade registers, commercial registers and central civil registers - and not rely on documentation supplied by the merchants themselves. Perry believes that with a business KYC solution, they can access and manage 80% of the required authoritative documentation at costs that are up to 90% lower.

A much greater onus is being placed on banks to have advanced solutions and processes in place to guard against the breach of official sanctions, when acting as a counterparty in trade activities, and to ensure that appropriate due diligence is applied in trade and trade finance transactions.


Given that many emerging regtech companies are small companies that focus on point solutions, there is growing debate as to whether they can work together in much closer partnerships in the future to present broader solutions.

“This is a unique industry, characterised by multiple smaller vendors focusing on small solutions that solve particular problems,” says Burgess head of product and client services at JWG, which has created a platform-based solution to help financial institutions manage all the regulatory documentation they need to understand. “However these vendors are also increasingly becoming focused on collaboration amongst themselves.” 

JWG itself partners with small regtech companies specialising in other aspects of regulatory compliance such as ClauseMatch, which offers one centralised policy hub in which policy documents can be hosted and maintained, enabling individual departments within a financial institution to collaborate on the documents together.

Kompany is another regtech company that is entering partnerships with other regtech providers to offer a broader service. “We entered a partnership with Tradeshift because it is very strong in workflow and supplier risk management and this complements what we do as an automated data provider,” says Perry. 

However, Liver believes that it is still too early to think about how multiple regtech companies can collaborate together. “They are doing lots of interesting things in an individual way and it is hard to see how all this can be fitted together into one overall plan,” he says.

Some banks have set up fintech hubs where they incubate start-ups and work more closely with them on emerging technologies that they recognise could add value to their own businesses. 

Perry welcomes the prospect of direct collaboration between banks and smaller regtech, “there is a lot of opportunity here for large banks – but even more so for mid-tier banks, which do not have the staffing levels required to build new advanced solutions.” 

Teaming up is never as easy as it seems, and Liver says, “culturally, there is also a big difference between large global banks and small regtech start-ups – and banks need to be sure about the regtechs they work with. They also need to work with an organisation that has scale – and most regtech firms are just not there yet.”

The scale that larger banks expect from their suppliers, also raises the prospect of greater consolidation in the regtech sector as a whole in the years ahead. 

“The most likely outcome may be convergence among those vendors in a particular solution space where they are trying to address the same regulatory challenge,” says Burgess. “Eventually, the market will sort itself out – and we may see some dominant vendors emerge.”

Accuity is keenly exploring partnerships with smaller regtech vendors, and does not discount the opportunities that may be presented by mergers and acquisitions.

“We live in a continuously changing landscape, and at Accuity we need to provide ourselves with as many options as possible moving forward,” says Das. “However, one of my observations is that sometimes smaller regtech vendors are presenting a ‘magic solution’ to a particular problem. But, simply having an idea is not enough. There needs to be infrastructure and know-how and all this needs to be knitted together.” {/mprestriction}