Compliance is sometimes seen as a mundane tick-box exercise, often overlooked by leaders in favour of revenue-generating activities. That needs to change.
Following the financial crisis in 2008, the reaction was to increase the number of staff employed in compliance roles hugely. Infamously, Citibank published an annual report detailing 30,000 compliance staff.
But throwing staff at this issue has not paid the expected dividends:
Just as it was clear that technology fuelled the financial crisis, it is also part of the solution, as is recognised in the FCA definition of RegTech:
"A sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities."
FCA Definition (2015)
Businesses now recognise that the old model is not sustainable because of a number of drivers of change transformation.
Cost of compliance
The ongoing cost of compliance is £28.7 billion across UK financial institutions, with an annual average of £186.5 million spent on AML costs. Larger firms spend closer to £300 million a year.
Climate change
ESG reporting has increased. With an estimated $18.4 trillion in ESG-orientated assets being managed globally, the FCA has established Sustainability Disclosure Requirements.
Regulatory pressures
Financial crime, data protection, and governance were the primary areas of regulatory risk in financial services in 2023, attracting the highest penalties. GDPR fines were record-breaking, highlighting compliance issues and regulatory pressures on companies.
RegTech can help compliance by automating routine tasks like KYC and AML checks, providing real-time monitoring and reporting, and ensuring timely updates on regulatory changes.
In an influential article, Law Professor Douglas Arner and his research team claim that RegTech has the potential to ‘lead to a paradigm shift in regulation’. It would enable real-time surveillance of the financial markets and even predict where risks and problems will emerge, ultimately moving supervision and enforcement from a reactive endeavour to one that is preventative. This would lead to cost savings and improved regulatory adherence.
Whether or not you agree with Arner, there is general consensus about the shorter-term benefits which RegTech can deliver:
There are a number of misconceptions about RegTech's capabilities. It can often be assumed that these technologies just automate basic tasks or are simply there to serve financial markets.
Compliance is a challenge for any organisation, and we are seeing a growing number of RegTech vendors develop solutions that are ‘regulation agnostic’. This means these tools can be used to support almost any organisation, no matter its specific compliance requirements.
Our taxonomy highlights the breadth of use cases available across these solutions. Across just two categories, ESG and General Compliance, there are at least a dozen ways that RegTech solutions can be harnessed.
Climate Risk Analytics: Products in this category include those which are aimed at helping financial institutions determine the financial risks associated with climate change so they can better understand their overall exposure.
Compliance Automation: Products focusing on making compliance automated and tech-enabled so as to make compliance efficient, swift and scalable.
Carbon Footprint Tracking: These products are aimed at retail bank customers and typically use the open banking framework to allow bank customers to track the carbon footprint of their transactions.
ESG Ratings and Analytics: Products in this category provide additional insights and analysis as well as provide a source of data.
ESG Risk Management: This category focuses on products that help firms manage their ESG risks at an enterprise level, providing platforms and dashboards to manage and mitigate ESG risks.
ESG Sustainability Reporting and Disclosures: Products in this category focus on the reporting and disclosure obligations included in regulations as well as the requirements of industry standards bodies.
Marketing Compliance: Products that ensure that an organisation's marketing, advertising and sales content comply with relevant industry rules and regulations.
Mortgage Compliance: Mortgage compliance software runs compliance checks and loan audits in real time to comply with relevant regulations for residential loan documents.
Operational Efficiency Solutions: Products that focus on making the operations of an organisation more efficient.
Supplier Management: Products focusing on streamlining supply chains to ensure buyers can achieve responsible and sustainable outsourcing.
Sustainability Management: Products in this category allow businesses and corporations to manage all aspects of their ESG performance, from creating and tracking ESG targets to collecting data against those targets.
Training & Learning Solutions: Software products that facilitate the education of employees on laws or regulations applicable to their job function or industry.
The technology behind these software products has greatly enhanced in recent years, and we’re now seeing ever more complex AI and machine learning algorithms taking centre stage across each of RegTech's sub-verticals. Below is a list of a few of the common technologies and their use cases in RegTech.
Application Programming Interface (API)
A computing interface that relays information between multiple software intermediaries.
Artificial Intelligence (AI)
The development of intelligent machines which think and work like humans.
Biometrics
Biometrics are body measurements and calculations related to human characteristics.
Cloud computing
The delivery of computing services (servers, databases, software, etc.) over the internet to offer faster innovation and scalability.
Robotic Process Automation (RPA)
Software-based technology that can be easily programmed to automate basic, repetitive tasks.
By shifting the compliance mindset to focus on becoming proactive and acting in anticipation of future problems, needs, or changes, you can reduce the likelihood and impact of compliance breaches.
A strong investment and ROI case can be made for compliance as a means of reducing costs. It can also act as a route to competitive advantage by boosting performance and satisfaction.
Better leverage of human assets is needed. Technology can automate iterative tasks, leading to fewer human errors and happier (hence more productive) staff.
KYC solution provider Passfort recently released a research report which brings some of these points to life. This research addressed a sample of 500 UK financial services consumers who had acquired a new financial product from their bank or building society in the previous twelve months.
The results of this piece showed that customers who received a better-than-expected onboarding experience:
We have created a series of comprehensive roadmaps to help you navigate the compliance landscape, supported by e-learning in our Essentials Library.
We also have 100+ free compliance training aids, including assessments, best practice guides, checklists, desk aids, eBooks, games, posters, training presentations and even e-learning modules!
Finally, the SkillcastConnect community provides a unique opportunity to network with other compliance professionals in a vendor-free environment, priority access to our free online learning portal and other exclusive benefits.