The rising stars of RegTech compliance solutions
June 09, 2020 • 13 min read
It’s perhaps no surprise that the RegTech market has boomed over the past few years. This is largely down to the growth in regulatory pressures facing firms and the evolution in how advanced these RegTech solutions are becoming.
Once only comprised of a plucky few start-ups, the RegTech landscape has rapidly grown with spending on the sector expected to hit $76bn by 2022. At the same time, the pace of regulatory change shows no signs of abating to the dread of firms throughout the financial services industry.
These businesses are already having to cope with squeezed margins and heightened competition pressures. Thankfully for them, they are now spoilt for choice when it comes to sophisticated and helpful RegTech compliance solutions with several rising stars already changing the game for 2020.
What is RegTech?
Simply put, RegTech stands for 'regulatory technology' and is the use of innovative technology to satisfy a regulatory requirements. RegTech has been around for some time but in the years following the financial crisis of 2008 there was a mass push towards new regulations.This has resulted in higher compliance costs, with some estimating this at around $10,000 per employee at the biggest institutions. To give these stretched compliance departments a chance, RegTech solutions are being increasingly turned to through either AI, automation or any other way of enhancing the current processes and systems adopted by regulated companies. Most importantly, with deep learning, programmers have been able to catch up to this swift pace of regulatory change and feed their algorithms more data to help them learn.
For instance, using website archiving technology to create indisputable records of website content has helped many regulated firms keep up with requirements demanded by record-keeping rules such as FCA COBS 4.1 or Article 16 of MiFID II. Other examples of RegTech compliance solutions include:
- Data management solutions
- KYC (Know Your Customer) and AML (Anti-Money Laundering) solutions
- Tax management solutions
- Risk management solutions
- Trade monitoring solutions
- Reporting solutions
- Portfolio risk management solutions
- Quantitative analysis solutions
- Solutions that help companies manage a specific regulation (such as GDPR)
- Regulatory change management solutions
"I think there's huge potential... whilst we would never endorse a particular [RegTech compliance solution], we understand there's all sorts of technology that in theory will help with compliance. That enables us to help encourage firms to adopt these technologies and if you can convene people around these challenges you can transform the industry." Gordon Chapple, manager of RegTech, Financial Conduct Authority
What is RegTech and ‘suptech’?
This compliance burden isn’t just being carried by regulated firms. The task of regulating the market has become more complex with increasingly intricate business models and multi-jurisdictional operations now the norm. Therefore supervisory technology – or suptech – is now being used by the regulators themselves.
Suptech is being used in a number areas. For instance, in data collection suptech applications can be found in reporting, data management and virtual assistance.
A number of regulators are already using suptech to innovatively implement a risk-based approach to supervision. Risk indicator dashboards, centralised data warehouses for supervisory reports and early warning systems are just a few examples of these tools.
These have already shown to hold up in times of market stress. During the worst weeks of Covid-19 inspired volatility, circuit breaker systems on the New York Stock Exchange - which automatically halt trading and bring in cooling-off periods during times of high volatility - were shown to work several times and have since been applauded for their success.
Why is RegTech important?
Regardless of the size or age of a financial services business, regulation is a crucial factor. And the cost of meeting these regulations is getting higher.
For example, in the US the cost of compliance across banking alone increased by over $50bn a year following the passage of the Dodd-Frank Act. This was a result of increased salary expenses as well as additional auditing, consulting and legal fees.And this isn't just a compliance issue. Across the financial services industry, margins have become increasingly squeezed. For instance, the ban on commissions within UK asset management in 2013 has forced many businesses to entirely reinvent their distribution models.
Around the same time, high street banks retreated from giving financial advice and are now finding it much more difficult to create financing solutions - thus spawning an entire industry of challenger banks, crowdfunding platforms and other alternative lenders. Overall, every where you look competition pressures have intensified and no financial services firms are immune. This has spawned a flurry of M&A activity over the years, with even the largest financial institutions having to buy up competitors in their pursuit of scale and profitability.
This has resulted in numerous job cuts, corporate restructures and fundamentally altered business models over recent years. As a result, the focus on efficiency has intensified with heavy compliance costs only adding to this pressure.
Therefore, RegTech compliance solutions that can ease this burden could drive efficiencies for businesses and help make a real difference. According to one research source, RegTech could deliver cost savings of $1bn a year for banking and property sale KYC checks alone by 2024.
It's clear, RegTech is becoming increasingly unavoidable for regulated businesses.
"We see RegTech as having the potential to reduce time and cost in compliance. Ultimately we believe this would result in better consumer protection and outcomes - we are keenly interested in this area." - Cuihua Cartwright, senior adviser (innovation hub), Australian Securities & Investments Commission
The big debate – should you build or buy RegTech?
As with any outsourcing situation, firms will ask themselves if it’s better to buy or to build their own RegTech compliance solutions. There are downsides to both and this goes beyond simply being a question about cost.
In fact, creating a RegTech solution inhouse could cost as much if not more than going down the outsourcing route. Salaries of top coders have increased exponentially over the past few years which proves another challenge for institutions that are already having to pay large amounts to attract, and retain, top talent in nearly all other areas. Instead, firms should consider if the RegTech solution they have in mind can meet their unique requirements and if it makes sense to create their own. Some regulated firms, with the scale and resources to do so, have created their own solutions to fit their own demands.
However, with vendors in the RegTech landscape becoming increasingly intuitive, more solutions are being launched that can match such idiosyncratic requirements.
Therefore the question of build or buy will be differently answered by each firm. But, as we list below, there are numerous top quality RegTech compliance solutions in the market so regulated firms are becoming increasingly spoilt for choice.
The top 7 RegTech compliance solutions to watch this year
A big part of oversight best practice is ensuring the ability to monitor employees’ activities, which is why instant messaging platforms have proven so challenging.
With this in mind, Qwil Messenger is an instant communication platform designed with compliance in mind. It has already been recognised for its ability to support GDPR compliance (a burden shared across both RegTech and fintech, as well as most sectors).
For its clients, Qwil Messenger's tech allows them to replicate and configure their client engagement models with only verified users invited on their instant messaging channel. With multi-jurisdictional hosting options, Qwil Messenger also provides recording, auditing and data controls.
The top RegTech companies work extremely hard to understand the regulatory requirement they focus on and then build a solution around it – with SteelEye definitely falling into this category.
With MiFID II dramatically raising the standard for Best Execution, SteelEye’s comprehensive and asset class agnostic solution helps firms meet these new reporting standards. Providing regular reporting and transaction cost analysis, SteelEye is able to help firms satisfy compliance and improve their trading performance.
SteelEye is proving popular with its clients for the time it saves compliance departments. When it comes to best execution products, SteelEye's tools capture all their clients' best execution reporting data and built their RTS 27 and RTS 28 reports. All data is enriched with external market and tick data (as required), which can be easily reviewed and validated. For a compliance team to do this themselves, would require extensive personnel hours.
As RegTech solutions go, Workiva is extremely helpful in the way it's designed to provide a holistic service. It has become increasingly crucial to regulated firms that they can show, on demand, evidence of their systems and processes to regulators.
Workiva provides an end-to-end solution, overseeing the management of data (from numerous sources, documents and data sheets), with reporting designed for the benefit of compliance interaction.
According to Workiva, nearly 70% of organisations have made significant business decisions based on inaccurate financial data.
Therefore, this RegTech offers a degree of risk mitigation too and has developed a framework that champions centralisation as part of a reporting process. As you can see below, Workiva clients benefit from having numerous data sources pulled together in a cleaner and more concise package.
Harnessing AI, ComplyAdvantage is proving invaluable in the fightback against financial crime with its proprietary anti-money laundering (AML) data feed that automates customer monitoring with KYC checks. AML activities can be hugely time consuming and compliance can’t be everywhere at once when it comes to monitoring transactions. So it’s encouraging that RegTech solutions like this can be used to help level the playing field.
The role of MLRO carries a huge amount of responsibilities, with ComplyAdvantage's founders finding that the same challenges continually came up - other tools were hard to integrate, difficult to use and produced numerous 'false positives'.
Therefore, ComplyAdvantage adopted a different architecture and leverages data science and machine learning to understand risk computationally. This has made the system much easier for clients to use with data updated in minutes rather than months.
With money laundering becoming increasingly easy for criminals who can hide among a sea of online transactions, it’s no surprise that the RegTech market has responded. Leading the pack in this niche is Forter, which has created an automated system that tracks trends and flag fraudulent spending in less than a second. Going further, Forter then provides a ‘decision-as-a-service’ offering – potentially approving transactions it has flagged, or leaving them for further investigation.
Such decisions are provided 100% in real-time and fully automated and scalable for the benefit of clients. Created with scale in mind, Forter is able to evaluate each and every customer interaction on behalf of its clients which help to immediate detect and prevent fraud attacks at any point in the customer journey.
This open architecture also allows Forter to tailor these solutions to specific client needs, which is another boost for compliance departments that want greater efficiency for their systems.
Designed with compliance personnel in mind, Continuity is an on-demand portal for policy management and an auditing program for fintech companies and banks. The company’s compliance tools automate the regulatory lifecycle in everything from managing new regulations to calculating risk and devising compliance strategy.
Beyond meeting the regulations, top RegTech companies can also play a pivotal role in compliance strategy at an operational level – with Continuity a prime example of this. A big part of Continuity's service includes alerting clients to changes in regulatory changes, providing condensed summaries and recommendations for any responses that are needed. This intuitive monitoring technology can also be turned inwards to help regulated firms better understand the risks they are already open to (working with over 4000 pre-identified key risk indicators tied to over 150 risk assessments).
In the age of GDPR, countless cookies and privacy concerns, Trunomi is a customer consent and data rights management platform. And with data security becoming such a prevalent topic across all sectors, we could be set to see more areas of the RegTech landscape capitulate on this area.
Specifically, Trunomi ensures that customers sign consent receipts confirming that financial institutions can use and share their data – which can then be tracked for the benefit of both parties.
Most importantly, Trunomi's solution allows for a tamperproof record of consent to be created answering the key questions - who, what, where, why and when. This can help client firms not only satisfy GDPR requirements but also generate revenue and build trust. Aiming at the financial services sector, Trunomi has also been designed to service a global and truly multi-jurisdictional approach.
"There's a great cost benefit to financial institutions, being able to handle fragmented regulatory regimes and evolving changes. There's a great opportunity there. What RegTech offers them is tremendous in the efficiencies of not spending 75% of their time doing reconcilliations but instead setting up intelligent new policies" - John Schrader, managing director, Duff & Phelps
A checklist to ensure a RegTech solution is right for you
Draw a link between the solution and a regulatory priority.
The simplest starting point is to objectively ask if the RegTech solution under consideration matches the regulation you have in mind. Thoroughly test the vendor and, if in doubt, grill the regulator on what the requirements of the regulation actually demand.
What are your digital transformation goals and where does RegTech fit?
RegTech solutions do not operate in a vacuum and have to be integrated with other systems used by the wider organisation. Collaborate with other departments and share notes to ascertain if these systems can ‘talk with each other’. This could save a lot of pain down the line.
How flexible is the RegTech compliance solution you have in mind?
Frustratingly, regulations change with frequency and the last thing you want is to spend money on a RegTech compliance solution that will soon be out of date. Interrogate the vendor and assess how flexible they are to change. Specifically, how long have they been in operation for? And have they been forced to adapt before?
Have you conducted a complete risk assessment to understand what’s required?
Like any solution, the RegTech solutions you choose have to be 100% accurate and well-fitted to your business. Make time to carry out full and frank due diligence of the system you have in mind. As well as focusing on that particular system, look across the wider RegTech market to assess how it has held up versus its peers. You could also get in touch with other clients to find out what their experiences have been like.
Where does MirrorWeb fit in?
MirrorWeb is a RegTech firm, providing archiving solutions to help financial services firms fulfil their record-keeping requirements, so we're right in the middle of this fascinating space. Our innovative crawl technology scours entire digital estates, creating immutable and tamperproof archives of websites and social media channels. We've engineered our solutions as the regulatory environment has developed, which has given us a front row seat to some fascinating trends.
One of which is, as there are a growing number of RegTech firms, more regulated businesses are enhancing their internal resources to make the most of this technology. This has led to the role of chief technology officer becoming more influential than ever before.