By L Guru Raghavendran, Senior Vice President, BFS Products at Azentio Software

RegTech companies are transforming the compliance landscape by providing latest technologies such as Cloud Computing, Artificial Intelligence, Machine Learning, Big Data and Automation to help financial institutions manage regulatory risks in an effective manner.

Key statistics: Why advanced technologies are imperative for compliance

• 10 – 15% of a financial institution’s workforce is dedicated to Regulatory Compliances (Source: McKinsey)
• Data Analysts in regulatory and compliance environment today spend 80% of their time only on data collection and organisation, and only 20% of their time on data analysis (Source: The New York Times)
• Global spending on compliance and regulatory is pegged at $270 billion and is increasing year-on-year (Source: Citigroup)
• There has been an increase of 492% in Regulatory changes from 2008 to 2015 (Source: Thomson Reuters)while Year 2020 had close to 220 regulatory revisions to keep track of in a day (Source: Deloitte)
• 28 institutions across 14 countries were fined for AML related violations in 2020 (Source: Kyckr)

While the above are representative numbers, they have paved the way for ‘RegTech’ to address the complexity, drudgery and risks within the lifecycle of regulatory processes, such as monitoring, compliance and reporting, with emerging technologies and automation.

Key areas where RegTech operates:

• Identity Management – Several RegTech companies are focused on validating the identity of a customer and use of technologies, such as AI for facial recognition is gaining steam
• Compliance – There are RegTechs focused on providing compliance services such as keeping track of over 220 regulatory revisions that may come in a day. For example, in payments compliance, there is an imperative need for authentication, verifications, payments service directive, etc.
• Regulatory Reporting – With a focus on data, the need for automation of regulatory reporting will bring benefits to BFSI institutions both in terms of timely as well as accurate submissions
• Risk Management – In 2019, the BIS Innovation Hub was established with the objective to foster international collaboration on innovative financial technology within the central banking community. One of the first virtual Hackathons was conducted specifically for RegTech and SupTech. A key area that was demonstrated was a ‘Cloud based real-time market monitoring platform’ that would provide real-time dashboards on data points such as market risk, market liquidity, and trading activity
• Transaction Monitoring – A critical area, considering the need for real-time transaction monitoring as well fraud management in payments, online transactions, trade surveillance, customer profiling and so on.

From a regulator’s point of view there are new challenges that need to be addressed in the digital era, such as agility, technical know-how, black-box algorithms, maintaining arbitrage and managing massive amounts of data. The vital issue here is that the challenges are juxtaposed against their strategic goals which continue to remain the same, namely, maintaining stability, enabling competition, and protecting consumers, while ensuring a level playing field.

Each country faces this quandary and addresses the same with regulatory updates. For example, to understand the importance of RegTech for the Indian market, The Securities and Exchange Board of India regulatory institution, set up a committee. Towards the end of 2019, the Personal Data Protection Bill, 2019, was introduced in the Lok Sabha by the Minister of Electronics and Information Technology. The bill is still being examined by a Joint Parliamentary Committee and could see a phase-wise implementation.

With the focus now on enhancing AML regimes to become more effective, reform proposals are underway across the globe. The European Union (EU) is expected to publish an AML Regulation in 2021, a departure from the use of AML Directives. In the USA, reforms are happening in the form of the AML Act of 2020, which is making its way through the legislative process.

With regulators focusing on increased effectiveness, the traditional rules-based approach to KYC compliance is changing to an outcomes-based process. As a result, the adoption of technology solutions by Financial Institutions will no doubt play a crucial role in taking preventive measures against financial crimes.

Globally, governments and regulators are gearing up to adopt the following:

• Speed: With 5G enabling speed, the entire process of data from collection to visualization, is being enabled on cloud data lake
• Emerging and new technologies, such as Artificial Intelligence, Analytical Models, Robotic Process Automation, Blockchain, Machine Learning and Big Data

These aspects also act as an indicator of the kind of solutions that will be provided and enhanced by RegTech companies for Financial Institutions.

RegTech is maturing and will grow at a faster pace in the next two years with COVID-19 accelerating the pace of change. In line with this, RegTech companies need to continuously evolve their product roadmap. They will have to play a key role in balancing the regulatory compliance requirements for Financial Institutions by providing market-driven technology solutions.