At the risk of making it sound simple, RegTech is largely what its name implies: Regulatory Technology. That means the use of new technologies to facilitate compliance with regulatory requirements. In other words, RegTech aims to provide easy-to-integrate and cost-effective compliance solutions.
Banks are currently facing the big challenge of coping with the flood of new regulatory requirements, which has been steadily increasing over the last 10 years. In addition to the PSD2, GDPR, the 4th and the 5th EU Money Laundering Directive to be transposed into national law by 2020, further guidelines are on the agenda. The most complex regulatory driven initiatives are currently BCBS 239, SREP, AnaCredit, IFRS 9, and Basel IV. So, regulatory efficiency is one of the most important issues for nearly every European bank.
Financial service providers and increasingly also insurers hope to integrate regulatory requirements more easily into their departments and IT in order to achieve more efficiency. One challenge here is the ever-increasing volume of data. By combining a range of new and often interconnected technologies, such as big data and data analytics, cloud-based services, blockchain technologies, and artificial intelligence, RegTech dramatically simplifies compliance for financial companies. RegTech aims in particular at:
- reducing conformity costs
- simplifying compliance processes by increasing automation and standardization of regulatory operations, thereby reducing manual efforts.
- increasing efficiency, which in turn fosters business flexibility and growth
- supporting companies to identify potential risks at an early stage and solving problems in good times
This allows companies to keep their controls and audits simple and cost-effective. RegTech helps them to understand their responsibilities and obligations, interpret and process vast amounts of information, and achieve scalability that the existing and technology-obsolete infrastructure can no longer provide.
The common RegTech solutions include the automation of monitoring consequently the comparison of sanction and embargo lists with customer data, the monitoring of transactions and trading in securities, as well as the assignment of customers, accounts and business partners to the appropriate risk class. In addition to the automation of processes to reduce manual operations, a minimization of false positives is to be achieved. The guarantee of data protection in all monitoring systems must not be left out of focus.
RegTech is usually called ’the new FinTech’ (Financial Technology) or a development resulting from FinTech. The FCA (Financial Conduct Authority) was the first government agency to promote the term RegTech establishing it as a subgroup of FinTech, which uses new technologies that could make regulatory compliance more efficient and effective than current tools.
RegTechs did exist before the term was coined a few years ago by the FCA. It must be admitted, however, that the new buzzword has predominantly been established in the financial services sector, but by no means must be restricted to it. RegTechs include many other uses and may also be used for environmental regulation, in the health sector, in traffic, or airline regulation. Every regulated industry benefit from new technological applications and their potential.
It is a challenge for policymakers and regulators to regulate fast-changing financial systems. While the main regulatory goals, such as financial stability, regulatory security, consumer protection and market integrity, as well as market competition and development persist, their applications are becoming increasingly inadequate. Given that regulators are also increasingly using new technologies, an additional term has lately prevailed. To be distinguished from RegTech is Suptech. A merged word from the terms Supervisory Technology. Suptech applications support the work of regulators and can therefore be understood as a counterpart to RegTech.
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