The term RegTech has been coined over the past year. Although it is a fairly nascent industry, deploying regulatory technology could lead to significant cost savings for the private banking industry. So what are the prospects and challenges along the way? John Schaffer finds out
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The term RegTech (combination of regulation and technology) has only become part of the financial services vernacular over the past year or so. RegTech could be viewed as a subset of FinTech that looks at implementing technology for regulatory compliance purposes. The innovations in this space can be incredibly wide reaching, including the use of straight through processing, APIs, analytics, artificial intelligence, robotics and Blockchain.
With the slew of regulatory pressures upon private banks, RegTech is being viewed as a way of mitigating costs and reducing the countless man hours that are put into due diligence.
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By GlobalDataPaul Garel-Jones, partner at Deloitte, tells PBI that although RegTech is a somewhat nascent industry, its application in banking is not necessarily new.
“Much of the work that we've seen our banking clients (including private banks) doing over the past few years is classed as RegTech, even if the badge of RegTech was not used until the last year.
“Some of the initiatives have been around know your customer (KYC) and onboarding. Those are RegTech even if they were not branded RegTech before.”
Patrick Barnert, CEO and president of Qumram, tells PBI that the compliance challenges that banks face is fuelling the momentum of the RegTech industry, with banks looking for solutions to regulatory problems through automation.
Qumram is a RegTech vendor that allows private banks and wealth managers to record the interactions they have with clients over digital channels, including on social media and messaging services such as WhatsApp. Barnert describes the service as a “black box” for banking. Notable clients include UBS and Credit Suisse.
“On average there are 155 daily alerts on regulatory changes globally, it's an ever increasing challenge for the banks to deal with these updates, and how they respond to them.
“We've seen over the past five to eight years that the cost of compliance has been driving a compound annual growth rate (CAGR) of more than 30% and that's expected to continue for the next few years.
“It’s also challenging for banks to find people willing to work in compliance. Compliance staff are now personally liable for almost everything the bank is doing. It's hard to find the people because it's a dangerous position to be in.”
Barnert explains that the rising use of digital channels is adding to the need for RegTech, with regulations such as Mifid II stipulating greater requirements:
“What we are seeing from regulators is that electronic communication is now named explicitly in these rules, as opposed to a few years ago when only telephone conversations or in person meetings were named.”
Barnert comments on Qumram’s work with Credit Suisse:
“The bank can record their online private banking application interactions in detail so that they know exactly what they have presented to the customer, how the customer interacts, whether the customer was informed about risks or about the right products. They're also using the data for customer service proposals.”
UK a favourable RegTech centre?
However, the Monetary Authority of Singapore (MAS) has revealed plans to provide a similar sandbox too. The regulator also mapped out a plan to move towards an open API architecture that can be easily used by RegTech vendors and banks.
Ed Royan, COO EMEA at AxiomSL, software provider of data management, regulatory and risk systems to banks, says: “Most regulators across Europe are increasingly engaging with RegTech firms and this is making the process simpler. Easier implementation can be seen in Asia Pacific and the Americas, but this is certainly a slower process.”
Are banks investing in RegTech?
“Banks have been investing in RegTech, but I think there's hesitation from the banking community around how to narrow down the organisations that they’re interested in investing in.
“There are many FinTech and RegTech vendors looking for clients, but the challenge for banks is working out which ones have something unique that can deliver value. That's how an organisation like Deloitte fits in, to help our clients work through the RegTech community and find companies that are relevant.”
Private banks have been marred by fines in recent years. However, Garel-Jones says that RegTech won’t be the panacea of cleaning up the industry’s image:
“I wouldn't go as far as to directly link RegTech adoption to the reduction of fines. I do think RegTech has a role to play in standardising and enabling more consistent processes in an organisation that can lead to a better controlled environment, which then has the potential to reduce risks.”
What’s next for RegTech?
“Initially, the IT process will be provided as a SaaS. Moving forward, business areas – namely advisory and preparation processes – will also transition into RegTech, while leaving the banks to sign-off. In terms of innovation, I think we will see big moves towards blockchain, big data storage and predictive analytics to help with real-time monitoring.”
Aaron Phethean, MarketPlace director at Temenos adds: “PSD2, even for private wealth, will have far reaching consequences. The investor competence and attitude to risk also seems to be an untapped and exciting area. The early movers will find innovations that address regulation and create new revenue opportunities.”
Garel-Jones concludes: “There will be a peak of vendors and then a tailing off as only the ones with unique offers float to the top. Overall it could be transformative for the banking industry as we move away from the complications of legacy architectures and move to a more agile environment, with different RegTech vendors providing pointed solutions and potentially having a big impact on the cost of compliance.”
