Regtech – what is it and why does it matter?

Martin Cheek

May 16, 2019

Martin Cheek (pictured) is managing director of SmartSearch

You have probably heard the term regtech, but may not be sure what it means, why it matters and how it fits with fintech.

The term regtech, which stands for regulatory technology, was first used in the UK about four years ago. It describes technology which helps banks, financial institutions and other regulated sectors meet the regulatory demands of reporting, monitoring, and managing compliance risks.

The idea behind regtech is that it offers solutions that not only save time and money, but that is far more reliable than manual processes.

Regtech in the UK is a booming industry. Almost a third of the 100 businesses in the regtech 100 are from the UK, and some of the most advanced technology in the regulatory market has been developed in the UK.

The growth of regtech in the industry is down to a number of factors, but one which cannot be ignored is the support it has received in the UK from the Financial Conduct Authority (FCA).

The FCA’s SandBox initiative – first launched back in 2015 – gives regtech developers the opportunity to test products and services and delivery of them in a controlled environment, and this has had a hugely positive impact on the rate at which the regtech industry in this country – both in terms of size and innovation – has been able to grow.

And in fact, it was so well received that the FCA has now partnered with 29 financial regulators from across the world to launch a global regulatory sandbox.

The Global Financial Innovation Network (GFIN) will look to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas. Last month the FCA invited applications last month to any firm that wants to test innovative financial products, services or business models in a live market environment.

And as more and more companies look to move to completely digital models, regtech will become even more important, as they will need to partner with businesses that can offer digital solutions, including for their regulatory obligations.

Plus, as the burden of regulation and compliance increases, it is becoming harder and harder for firms to keep up via manual methods. Electronic platforms and other regtech solutions can help ease that burden, making it easier for regulated companies to keep up without having to employ more staff to build the technology or processes they need every time the regulatory landscape changes.

Currently, KYC and anti-money laundering (AML) solutions make up the bulk of regtech firms in the UK. AML rules are constantly being updated, and in fact, the most recent change to the fifth Money Laundering Directive actually called for regulated businesses to start using electronic solutions wherever possible in an attempt to move away from manual identity checks. This is because, with the increasingly sophisticated fake documents now being produced, manual checks can no longer be relied upon.

And, its changes like this – which will come into force this year – that will also have a huge impact on the regtech industry.

Businesses are realising that by adopting regtech solutions, they can not only reduce their costs in terms of the number of people needed to do KYC checks and enhanced due diligence, etc, but also in terms of the efficiency of their staff, as instead of wasting time checking false positives, they are able to concentrate on investigated real cases.

Companies also find they can increase their revenue by adopting regtech because it allows faster completion of KYC and AML requirements which results in increased competitiveness, customer satisfaction and retention.

Regtech is one if the fastest growing industries in the world, with funding at record levels. In the first six months of 2018, $2.5bn was raised – equivalent to 87% of the total’s capital raised by regtech companies in 2015, 2016 and 2017 combined. So, it is clearly an industry to watch, and with the UK right in the thick of it – investment in UK regtech companies more than doubled between 2014 and 2017 – and predictions are that it could become one of the UK’s most important industries.

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