Financial institutions are currently managing ever-changing regulations while being increasingly exposed to complex multi-jurisdictional demands. Furthermore, regulators now demand much more transparency—meaning an increasing amount of data needs to be produced by financial institutions to improve visibility of systemic risk. To gather, analyze, and compute all the required data, institutions make use of a variety of technology systems, but the truth is that much of this work still heavily relies on manual processes and interventions.
The greater demand for transparency and rigor has brought the role of technology to the forefront, leading companies to simply ask themselves the following question: how should a financial institution address compliance in a more efficient and less resource-consuming manner while improving the quality of the data reported to regulatory supervisory authorities?
Regulations such as Packaged Retail and Insurance-based Investment Products (PRIIPs), the Payment Service Directive 2 (PSD2), the fifth Undertakings for Collective Investments in Transferable Securities Directive (UCITS V), the Markets in Financial Instruments Directive (MiFID), the fourth Anti Money Laundering Directive (AMLD IV), the Capital Requirements Directive and Capital Requirements Regulation (CRD and CRR), the European Market Infrastructure Regulation (EMIR), and the second Market Abuse Directive (MAD II) are just a few examples of the systemic shift in terms of compliance and risk, capital and liquidity requirements, and governance and supervision with which all investment management players must comply.
Firms have been cautious to innovate due to the regulatory uncertainties underlying the development of new products and the deployment of pioneering technology. However, the last years have witnessed the emergence of promising and innovative companies targeting the regulatory environment to support efficient compliance management from an IT perspective—the so-called RegTech companies (RegTechs). Put simply, RegTechs offer solutions that use technology to solve compliance and regulatory issues.
Historically, financial institutions have had the choice of using large, well-known vendor systems or building an in-house solution. In selecting and implementing such technologies, different challenges arise.
Firstly, the chosen solution must fit into the often complex and heterogeneous internal architectural IT environment of the company. Secondly, reporting and visualization tools are typically used on a very local level within different departments, and not always governed centrally. Finally, regulatory pressures require fast implementation, which often conflicts with financial firms’ development and transformation planning.
Technological innovations continuously emerge, offering new risk and compliance solutions to help financial firms to comply and manage their risks at lower cost. RegTech solutions present themselves as being able to tackle several of the aforementioned issues by providing agility, speed, and data-driven outputs. These attributes are enabled through multiple emerging technologies. Generally, such solutions tend to be cloud-based, meaning that data is remotely maintained, managed and backed up. This provides enhanced flexibility through the ability to customize control over not only the access to but also the sharing of the data. Cost-wise, the cloud is especially interesting as it provides the ability to offer pay-as-you-go pricing.
Some RegTech solutions use Blockchain—a record or ledger, of digital events distributed between many different parties that collectively guarantee the scalability and integrity of the said ledger. Through the Blockchain’s near real-time settlement capability achieved through automation and global consensus, RegTech solutions can automate compliance aspects in cases such as identity management and transaction processing, settlement and reporting.
As the RegTech space is in its infancy and is developing rapidly, it is difficult for financial firms to identify and commit to a particular technology or solution. In addition, several constraints remain, such as those related to the sharing, storing, processing of, and access to data. A general wariness of banks and other financial actors to implement RegTech solutions mainly originates from the need for enforcement authorities and supervisors to approve the use of such innovative products and services as well as apprehensions resulting from such solutions being as yet unproven.
How data will be handled in terms of ownership, analysis, maintenance, and security will drive the selection of innovation and technology linked to RegTech.