5MF Issue 12: RegTech Is About To Change Compliance As We Know It

Financial regulations constantly change, requiring ongoing diligence from large compliance teams. Automation, AI, and other tech developments are changing that.


In 2019, the Securities and Exchange Commission (SEC) fined financial firms a total of $4.3 billion in penalties and disgorgement, up from $3.9 billion in 2018 and $3.7 billion in 2017.

 

That’s a pretty penny for noncompliance.

 

To avoid these penalties, banks and other financial service providers employ compliance teams, sometimes spending up to 5% of their revenue on them, in order to keep up with ever-changing regulations. These teams review policies and procedures to make sure they’re aligned with new regulations, advise risk management about issues, assist with audits, and more.

 

Now, to keep up with rapid changes to the financial landscape, regulations are evolving at break-neck speeds. Innovative tech companies may have an answer for how to keep up. Many have found a way to leverage developments like AI, blockchain, machine learning, and natural language processing to help banks and financial services companies keep up. Meet Regulatory Technology, or RegTech for short.

Today’s Robotic Compliance Team

Banks have to remain compliant with numerous and lengthy regulatory acts and documents. The Federal Reserve, FDIC, OCC, CFPB, and FSOC all produce and oversee federal regulations, and each U.S. state has additional regulatory bodies.

 

It’s a lot to keep up with. As regulations change, compliance teams work to quickly organize the new data and compare it to existing practices. Manually, this is almost a Sisyphean task. But with the help of AI and machine learning—which can digitally organize, compare, and identify discrepancies 24/7—it’s much more manageable.

 

In a nutshell, RegTech is today’s robotic compliance team. It uses information technology to monitor and report on regulations and automate compliance. With the help of these tools, organizations quickly generate compliance reports, avoid human error, and flag issues automatically in real-time.

No Two RegTechs Look Alike

RegTech is technology, but its primary purpose is to assist with complex compliance issues. We’re not talking about your average, young-blooded Silicon Valley startup. Providers need to be deeply familiar with regulations, and as a result they tend to be financial consulting companies or tech companies who have partnered with consultants. 

 

There are about as many forms of RegTech out there as there are regulations. Companies like IdentityMind help firms fight fraud and manage risk. To keep up with data and privacy concerns, Trunomi helps manage customers’ consent to data use.


Technologies commonly used in other applications are also making their way into RegTech. Chainalysis uses blockchain to prevent money laundering, fraud, and cryptocurrency compliance issues. Ascent compiles regulations from multiple bodies and makes it easy for firms to find relevant documents for their needs. Continuity aids with policy management and auditing.


The list goes on and on, and with large technology companies like Cisco and IBM acquiring RegTech companies and Oracle and SAP rolling out their own RegTech tools, we’re clearly still in the early stages of this technological boom.

Assembling the Right Tools for Your Compliance Puzzle

For financial service providers who find their compliance teams stretched thin, RegTech provides a solution. AI and machine learning can flag compliance issues, create audit trails, and even predict risk for new contracts or projects.

 

However, it’s crucial for a bank or firm to team up with the right RegTech company to meet their needs. For example, a bank looking to ensure compliance with customer consent and data regulations would be best off partnering with Trunomi for that need, not IdentityMind or Chainalysis.

 

Unfortunately, the rub here is that no one has yet put all these services together in one place. Compliance and risk management teams will likely still need to do some things the way they always have while taking advantage of RegTech tools that meet the most unwieldy needs. Managing these different tools and processes may take some time to streamline, but less time than sticking with manual processes for every compliance area.

RegTech’s Potential Impact on Finance

Regulations are complex, and growing more so with every update. According to Juniper Research, RegTech spending is set to exceed $76.3 billion by 2022 as banks and financial firms work to keep up and battle noncompliance.

 

That’s not necessarily a bad thing. RegTech increases transparency and consistency, and reduces errors and risk. It standardizes processes and reduces strain on resources. The real-time capabilities of RegTech solutions even open the door for financial service providers to innovate with new, secure customer products like self-service portals.

 

With RegTech, banks and financial firms can manage compliance, risk management, identity management, regulatory reporting, and transaction monitoring more easily than ever before. For now, it’s a form of helpful automation. In the future, it could be a necessity.

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