Other parts of this series:
What a week—with graduation days complete, we had a chance to review progress in the Labs. Development was evident everywhere—product, but also management teams.
I wanted to follow on from my previous blog around the emergence of RegTech (technologies that address the challenge and cost of regulatory compliance) to explore how investment trends in this area are impacting the industry and how the ecosystem can work with the regulator. We’re lucky to have Jason Boud—who is pulling together a strong community in London—with us in the Labs.
Right now, compared with fintech, RegTech has low investment for the size of spend. Although governance, compliance and regulation (GRC) represents around 15-20 percent of run-the-bank costs and 40 percent of change-the-bank costs, in 2015, US$588 million was invested in RegTech¹ versus US$22 billion in fintech². This suggests enormous potential for growth in the RegTech space from now on.
Now—what does RegTech mean? RegTech means… RegTech! We think about RegTech as technology that lowers the “cost” (technical, physical, monetary) of regulation by using technology. It’s relevant not just in banking, but capital markets, wealth management and insurance. At its most basic, RegTech might be using better data, a workflow to reduce the complexities of reporting—or responding to new reporting requirements. Perhaps it’s making better use of existing data to lower the challenges of regulation for compliance staff—as FinTech Labs start-up, Enford, is excelling at. At the more advanced end—and with a timeline a few more years out—perhaps it’s applying machine learning or advanced AI to complex regulatory documentation, to help us ‘learn’ what the regulatory requirement is and apply a response to it.
The RegTech ecosystem requires several different backgrounds to come together: finance, entrepreneurs, regulators, lawyers and change managers. Now—given that background, employees in these areas often have a deeper knowledge base and clearer career track in industry (and salary expectations) than perhaps people who have founded traditional fintechs. There’s a risk that fewer start-ups will enter the market; so we think the area would benefit from a degree of nurturing. Lessons can be learnt from how banks partnered with fintechs. This should provide a clearer roadmap for growth, help identify pain points in adoption and build confidence.
We’re certainly seeing an upsurge in activity. It’s great news for the industry, but it also raises a number of priorities. As more and more solutions are launched, it’ll be important to prevent the marketplace from becoming fragmented. Start-ups need to ensure that they’re not point solutions, but can be embedded across the business, and that they can collaborate with other RegTechs to provide more complete solutions. That might mean, for example, a trader surveillance RegTech that tracks computer activity partnering with voice recording and behavioural analytics to provide a more comprehensive solution.
For problems at the most regulated end of the business, they’re likely to be even more cautious about entering partnerships. Banks that will lead here will be the ones that are already successfully integrating their innovation agendas into the business and have built channels for partnering with fintechs. In other institutions, regulatory and compliance functions may have to go through the same learning curve as their colleagues did with fintech before they establish effective RegTech partnerships.
Regulators have a key role to play, too. They can help drive adoption and lower the regulatory burden by collaborating with the industry to enable greater clarity and more long-term planning. Once banks have a clearer view of what lies ahead, they’ll be more willing to invest in new technology solutions and less likely to make ad hoc, incremental changes. Certification or approval of RegTech solutions would be helpful too, allowing banks to use RegTech with more confidence.
The FCA is being extremely proactive in this area: Its ‘regulatory sandbox’, which allows start-ups to test products in a live environment, is now being copied in other jurisdictions. Looking ahead, Accenture has called on the FCA to become the ‘Github of regulatory code and business logic’. If regulation is written to be machine readable, it’ll help create a standardised set of rules and logic that ensures compliance and compatibility with technology solutions.
Banks know that they should partner with RegTech… but they don’t always know how. Guidance from the regulator will be key to fostering a richer ecosystem—one in which banks feel confident about the trajectory of regulation, and where start-ups can quickly and easily assimilate the logic of regulation to deliver the innovative solutions that are so essential.
Watch this space!