With all the new global regulations that have been introduced after the financial crisis of 2008 (among them Basel II, MiFID, AIFMD, Dodd-Frank, IFRS9, BRRD, GDPR) compliance teams around the world are under more and more pressure to deliver on their obligations. The global regulatory load has increased by 492% in the years 2008–2015, leaving financial institutions with the problem of compliance.
Financial institutions are subject to a complex regulatory and supervisory regime, which has a positive effect on the level of security of both supervised institutions and the entire financial system. However, the need to bear the high costs associated with ensuring compliance is an immense burden. The above-mentioned changes have led to significant reduction in the efficiency of these institutions. In the midst of this regulatory environment is it still possible to reconcile security concerns with a high level of efficiency?
A Future of Regulatory Uncertainty
Nowadays regulatory uncertainty and changes are also triggered by political developments. Reuters reports that the Trump administration and Brexit are seen as the most significant compliance challenges institutions face today. It is not only political factors which are seen as a threat but new significant pieces of European legislation as well. Some key pieces of regulation came into force in 2018, including one of the most important, Markets in Financial Instruments Directive II (MiFID II) and the associated Regulation (MiFIR). What is more, a new regulation is coming into effect in May 2018; the General Data Protection Regulation (GDPR) which introduces fundamental changes to how the personal data of EU citizens is to be handled. Financial services firms which deal with this kind of data now need to ensure compliance with the new law.
Transparency requirements for financial firms are becoming more complex, more voluminous, and stricter. Boston Consulting Group (BCG) reported that the global volume of regulatory revisions that banking Chief Risk Officers have to monitor and implement has escalated to an average of 200 per day, three times what it was in 2011. What is more, financial penalties for noncompliance imposed since 2009 were equal to $345bn. Banks are struggling with compliance costs, which are estimated to be equal to about one-fifth of the total operating budget and around 4% of their revenue. Advisors from Duff Phelps forecasted that compliance costs would snowball, to more than double over the next five years. Reuters‘ Cost of Compliance 2017 survey revealed that more than one-quarter of financial institutions spent at least a whole day every week tracking and analyzing regulatory change.
RegTech: Market Disruptor
Firms are dealing with regulatory change and uncertainty, which creates a real need for the development and implementation of new solutions. Financial institutions are open to taking advantage of new regulatory technologies provided by RegTech companies to keep a high level of efficiency. The impact of new technologies is increasing. In 2018, almost half of the global financial institutions are expecting more involvement of RegTech and fintech solutions when it comes to compliance. Automating processes can ensure that firms comply with international regulations. Innovative technologies will, no doubt, continue to enter the market over the next few years, helping provide the solutions which can maximise firms’ potential. Compliance costs are set to continue rising over the next few years, meaning RegTech has a great growth opportunity. Global RegTech investments were equal over $500m in the first quarter of 2018.
Fintech Disruptors 2018 conducted a survey look at which areas of RegTech that interest investors most. Investors reported that Know Your Customer (KYC) compliance and AML (Anti-Money Laundering) regulation were the most compelling use cases for RegTech(60%), the second area of focus was privacy and data protection compliance (51%) and following that data and analytics reporting (43%). Additionally, blockchain and artificial intelligence (AI) remain popular as a potential solution for regulatory headaches.
The market has noticed a real need and responded to it through looking to the latest technologies to help deal with regulatory pressures. RegTech solutions can support the collection, interpretation and reporting of data to meet regulatory needs using technologies such as Big Data, data mining and analytics, cloud computing, machine learning, biometrics and the popular blockchain. Traditional solutions have a problem adjusting quickly to new changes. When designing RegTech solutions tools are modelled so that they can be easily adapted to changing requirements. In addition, they usually offer much more accurate data for supervisory authorities. The increased level of accuracy and availability of information, in some cases even in real time, will help to increase the level of transparency and decrease the level of risk.
Is it Really the Future?
Indeed, RegTech solutions are already proving a vital accelerator for firms in meeting heightened regulatory expectations. RegTech in the coming years will become, on the one hand, an efficient tool for the financial institutions to reduce costs generated to ensure compliance, and on the other hand, it might eliminate the gap in the communication between supervisors and supervised. In a financial world which is facing regulatory obligations expanding rapidly, RegTech is gaining traction as a faster, simpler and cheaper way of meeting all obligations; a go-to solution that is likely to skyrocket in popularity as financial institutions look for answers to tackle compliance issues.
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