The role of RegTech in navigating the ever-changing regulatory landscape

Navigating the landscape with technology

Given the ever-changing raft of financial regulations, RegTech is becoming more and more important to financial services firms.

The implementation of MiFID II, GDPR, new anti-money laundering (AML) directives and the Senior Managers and Certification Regime (SMCR) have all added to the pressure on compliance departments. Brexit has also contributed to the compliance burden, with the likelihood of the loss of passporting rights and a sense of ambiguity around how regulations might change. Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA), has stated that Brexit could provide an opportunity for the UK to rethink its financial regulation, which might mean more changes on the way.

Keeping up with regulatory requirements and managing compliance means harnessing technology to its best effect. Recent research from the Intelligence Journal shows that the RegTech market is soaring at 24.2% CAGR, and is expected to reach 4060 million USD by 2024. This is largely because more and more financial services firms are turning to RegTech to be able to manage their mounting compliance obligations.

Record fines as regulators take action

Moreover, regulators across many jurisdictions have increasingly been clamping down hard on non-compliance. The FCA, the SEC and the German regulator BaFin have all issued large fines for money laundering, conduct and GDPR breaches in the past year. In fact, since the financial crisis in 2008, global financial services firms have paid out a total of US$300 billion in fines for compliance breaches, and 10-15% of the global banking workforce is dedicated to governance, risk and compliance.

RegTech and AML

AML regulation, in particular, has become more complex in recent years. AML is one of the most costly and risky areas of financial regulation – according to the UN, only 1% of global financial crime is currently caught and yet the industry spends at least $30 billion to capture that fraction of cases.

Just as financial services and law firms were starting to get to grips with the demands of the Fourth Anti-Money Laundering Directive (4AMLD), the fifth iteration of the directive (5AMLD) is due to come into force. The FCA has also outlined AML and the prevention of the financing of terrorism as one of its key priorities for 2019/20.

A key aspect of 5AMLD is enhanced due diligence in relation to transactions that come from countries deemed to be high risk, and the ‘blacklist’ of countries that fall into this category has been updated and extended. The enhanced due diligence and stricter reporting restrictions that need to be applied can be handled with ease with RegTech anti-money laundering software, such as Lawson Conner’s MaxComply.

Managing regulatory change

Keeping track of regulatory change is an onerous task for financial services firms. Recent research from Thomson Reuters found that more than a third of financial firms continue to spend a whole day a week tracking and analysing regulatory change, which could be a phenomenal waste of resources. RegTech can automate internal policy management, and track regulatory change even across multiple jurisdictions, freeing up in-house resources to focus on core, profit-generating activities.

With the uncertainty of Brexit looming, this feature of RegTech is likely to be more invaluable than ever. As mentioned, the FCA has stated that it may look upon Brexit as an opportunity to rethink UK regulation, and it is likely that over time UK laws will start to diverge from EU directives. For firms with a global footprint, keeping track of local nuances across different jurisdictions will become a serious challenge without sufficient technological support.

The transformational role of technology

New technologies such as blockchain and artificial intelligence (AI) have played a pivotal, transformational role in assisting financial services firms with the regulatory landscape. AI, for example, can not only automate manual processing tasks, reducing the risk of human error, but also, when combined with big data, it can help with more complex decision-making activities such as deal sourcing, as well as the analysis of market data in the due diligence process.

Onboarding clients and investors is another task that can be simplified with RegTech. As well as managing AML and KYC requirements, and monitoring regulatory change, a robust audit trail must be maintained when onboarding to satisfy reporting requirements. Compliance software, such as MaxComply, is the best way to provide this audit trail, minimising human error and proving to regulators that due diligence has been carried out.

Regulators are also advancing technology to improve the way regulatory change is communicated and translated, taking a proactive stance in promoting and developing RegTech solutions. Last year, the FCA launched a tech sprint in an attempt to translate some of its handbook and certain directives into code, speeding up the efficiency and effectiveness of regulatory requirements. US regulators are also experimenting with this initiative and if their endeavours take off it will make RegTech even more central to compliance.

The future of RegTech

Other technological advancements that can assist financial services firms to manage compliance include ways to address requirements around recording voice and chat messages for regulatory compliance under MiFID II, trade surveillance and further steps towards more uniform regulatory reporting.

RegTech is still new generation technology to a certain extent, but as all the underpinning developments such as AI, big data, blockchain and voice control mature and become more powerful, there are infinite ways it could develop to be even more useful to the financial services industry.

About Lawson Conner and MaxComply

Part of the IQ-EQ group, Lawson Conner is an award-winning provider of outsourced regulatory hosting and compliance solutions. Lawson Conner’s bespoke MaxComply compliance software assists with AML regulations, due diligence and onboarding, ensuring compliance with the latest regulatory changes. It also reduces manual processing, cutting down on the risk of human error and slashing processing times by up to 80%.

MaxComply can be provided as a standalone service or as part of a fully outsourced compliance package that harnesses the knowledge of our compliance experts. To find out more please visit our dedicated MaxComply website or feel free to contact me directly to discuss your requirements:

T: +44 207 305 5810