Financial services

RegTech brings innovation to the regulatory response

RegTech is a marriage between regulation and technology, and the most promising solution to the challenges posed by modern-day compliance and risk management.

Driven by the desire for greater regulation following the worldwide financial crisis and enabled by the rise in digital technology solutions, RegTech has the potential to radically change how compliance and regulation are managed and carried out across the industry. Providers seek to enable closer cooperation of financial services institutions and regulators, and improve outdated approaches to compliance. RegTech is emerging along three lines:

1. How to integrate new regulation technologies

Services such as peer-to-peer (P2P) lending, where there is no central intermediary, or distributed ledger applications, where responsibility is decentralised, often sit outside of traditional regulatory restrictions and therefore challenge the historic regulatory model.

Fintech companies and regulators need to establish deeper relationships and create an open dialogue, which would allow them to work more collaboratively and bridge the cultural differences and knowledge gap between fintech entrepreneurs and regulatory experts.

In the UK, the Financial Conduct Authority (FCA) has been proactive in identifying how to respond to this emerging area by reaching out to the RegTech providers and, based on its business plan 2016/17, will continue to use this avenue to reduce the regulatory burden on firms. It is a positive signal of intent to support and promote this emerging area, where cloud technologies, software integration tools, technology accelerators, visualisation and robo tools, big data techniques, real-time and system embedded compliance/risk evaluation tools will shape the future.

2. Filling and future-proofing compliance gaps

A common theme in mis-selling scandals has been the lack of accurate records to support decision-making; even increasing online engagement with the customer has not provided a robust audit trail and the risk of significant remediation remains.

Innovative solutions should inherently meet conduct and compliance requirements, and also build in RegTech to future-proof their implementations.

3. Automation of current manual processes

RegTech differs from traditional software solutions by connecting machine learning, advanced models, algorithms and real-time capabilities. It can provide tools for audit, finance and risk management, putting stronger, efficient and effective control functions into place. RegTech can develop software solutions, which inherently apply regulatory and compliance obligations.

By applying regulatory and consulting expertise, Grant Thornton has created a tool to track regulatory requirements and the response to them. The requirements and regulatory tracking (R-Squared) tool coordinates a response to regulatory requirements from multiple functions or silos, which traditionally have caused a large headache for change programmes. By leveraging the cloud and providing mobile access to individuals across the business, the tool allows the capture, in one place, of all the sections of the relevant regulatory notice(s) in a format that can be easily interrogated, tracked and reported against. This in turn provides much-needed insight to the operational impact of regulation and saves considerable effort.

RegTech applications are here now, and early adopters are benefiting from the integrated management of compliance and regulatory obligations. This will continue as the opportunities unleashed by fintech mature.

For further help on this topic, contact Neil Furnivall, Associate Director, Financial Services Advisory, on neil.g.furnivall@uk.gt.com or Miles Davies, Associate Director, Financial Services Advisory, at miles.a.davis@uk.gt.com.

Words: Neil Furnivall, Martin Grynig