When you see regtech, most likely you think AML and many of the firms related to KYC onboarding procedures. Up until now, at least. With the fintech space continuing to grow, more and more functions related to financial and regulatory reporting, client scoring, and risk management in general are being outsourced; this work is picked up by specialized service providers who themselves apply new technologies in automatization, forecasting and data presentation – hence being coined regtechs in their own right.
A recent Thomson Reuters survey reported that regtech solutions were increasingly having an impact on the management of compliance. Almost half (49%) of respondents are now considering regtech solutions to manage compliance, up from 34% in the previous year. The main objective of regtech companies is to allow financial institutions to focus on their core business, while assisting them to achieve a high level of compliance. That means taking a large chunk of the responsibility in making sure everything is in order, especially when the regulator comes on knocking at the door.
Let’s focus on regulatory reporting, as the survey respondents identified this regulatory risk management area as the having the most potential to impact their institution (up to 42% from 33% previously, see image Figure 6):
As the adage of “garbage in – garbage out” goes, the only efficient way to achieve a clear and transparent regulatory reporting process is to make sure that the data coming from the core banking and accounting systems is precise, clear and whole. Both the Board of the financial institution, and the regulator will be able to judge whether regulatory reporting calculations are correct only if there is a clear audit trail of data from the source, via periodic records in a database, through to formulae, and finally, conclusions. Thus, a large part of the work performed by regulatory reporting regtechs is focused on data itself.
Secondly, let’s talk about the impact of the cloud. According to SteelEye, traditionally, the financial services industry has been conservative in moving to the cloud. Concerns have been raised about cybersecurity, data privacy and data management. EU cloud hesitations have centered on the fact that big cloud providers, such as Google and Microsoft, are US-based companies that store data outside the EU. Luckily, most providers have now refined their offerings to help mitigate these issues, and cloud services are actually just as secure, if not more secure, than on-premises solutions, as long as they are implemented with caution. For tegtech companies, this now provides a great way to work with customer data directly within the confines of the clients' systems.
Finally, improvement of data quality will be a priority for regulators this year. Many regtech are seeing regulators approaching them, wanting to know more about the capabilities of products, and inviting to participate in test labs and sandboxes. Regulators are holding joint working groups with regtech companies in order to better cope with upcoming challenges and market changes. Here, again, the focus is on what data the regulator needs to access to feel comfortable of having oversight on a fully transparent workflow. The OECD Business and Finance Outlook 2021 also draws attention to data quality, standardization and completeness as the key challenge and risks of suptech (another new buzz word, related to supervisory technology). Suptech applications rely on machine-readable data – i.e. in a format that can be processed by computer programs. As such, quality, standardization and completeness of data are key requirements and can pose major challenges, especially upon leveraging unstructured data collected from non-traditional sources of information (e.g. open source or social media).
Is this a new trend? Yes and no. No, because financial institutions have always been very keen of having a clean kitchen and invested heavily to make sure it’s spick and span. Yes, because now regtech can help those same financial institutions achieve much high levels of accuracy that had previously been deemed to be unattainable, through new automatization tools available and/or through the deployment of AI.
And data will be at the core of the evolution of regtechs and financial institutions alike.
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