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How Next-Gen RegTech is Streamlining Compliance for Financial Firms

As financial regulations continue to evolve, business and compliance leaders at financial firms are facing new challenges in meeting regulatory requirements. Firms will continue to pursue digital transformation efforts in other areas of their organizations; as they do, they also are eying or already investing in technology designed to assist with regulatory compliance.

RegTech, or “regulatory technology,” refers to software solutions that help financial institutions streamline and automate processes associated with compliance with regulatory requirements. According to a December 2023 study of existing RegTech applications in the financial services industry, “the adoption of RegTech [has already] provided advanced risk assessment and monitoring capabilities that increased compliance with regulations, minimized financial misconduct, and improved the stability and profitability of the United States banking system.”

In this article, we explore how a new generation of RegTech solutions is simplifying compliance and risk management in the financial industry. We identify opportunities and both positive and negative outcomes, with recommendations as to how business leaders can identify the right RegTech for their firms.

How Serious is RegTech Today?

RegTech in the financial services industry has been around for decades, but it grew in popularity especially following the 2008 financial crisis. At this time, the industry faced increasing regulatory scrutiny and pressure to adhere to stricter compliance measures. Today, RegTech has become a major focus for financial firms as they seek efficient ways to comply with complex regulations.

But according to the 2023 study, complying with banks costs financial institutions roughly 12% of their operating costs or $50 billion annually—even after RegTech had achieved a level of maturity within the industry. Now, “Multiple surveys by market research companies [have] indicated that RegTech is on track to show a compound growth rate of over 20% between 2023 – 2027,” according to the study—exemplifying a trend of growing adoption within the industry.

Positive Impacts of RegTech

In principle, RegTech offers clear benefits by automating key aspects of risk assessment, monitoring, and support, complementing manual tasks associated with meeting regulatory requirements. For example:

  • Reducing the cost of compliance: Firms that rely on manual labor alone for compliance may find these methods increasingly costly as regulations become more complex. RegTech’s automation capabilities have been a great help in reducing those costs.
  • Improving compliance efficiency: RegTech solutions can streamline processes that were previously time-consuming and resource-intensive. This frees up employees to focus on more high-value tasks.
  • Enhancing risk management: RegTech solutions increasingly use advanced technologies like artificial intelligence (AI), machine learning (ML), and natural language processing (NPL) to identify potential risks more effectively and efficiently.
  • Ensuring timely completion of compliance-related tasks: With the help of automation, RegTech solutions can monitor and alert financial firms in real time about any potential compliance violations. This allows for prompt remediation before issues escalate.

Collectively, the use of RegTech in the industry has already contributed to “higher stability in the banking industry by reducing risk due to financial misconduct,” the 2023 study describes.

Negative Impacts of RegTech

Despite these benefits, RegTech has driven some unintended consequences. For example, data privacy issues and discriminatory lending practices were named as potential risks in the 2023 study. Additional risk factors include:

  • Uncertainty in regulatory interpretation: As RegTech solutions continue to evolve, there may be discrepancies between how regulators interpret regulations and how RegTech systems implement them.
  • Cybersecurity vulnerabilities: With the digitization of data and processes, financial institutions are at risk of cyberattacks that can compromise sensitive information.
  • Lack of standardization: The lack of standardization in RegTech solutions can create challenges for firms when it comes to compliance audits and reporting. The responsibility for accuracy continues to rest on financial firms, even as they adopt new RegTech technologies.

Financial firms must carefully assess the risks associated with adopting a particular RegTech solution and ensure they put appropriate measures in place to prevent these negative outcomes.

5 Ways Firms Can Approach RegTech Adoption Successfully

Despite its potential risks, RegTech may soon become simply a necessary part of doing business. Indeed, regulators themselves adopting their own RegTech solutions, where “firms of all sizes would be well-advised to initiate regular, in-depth conversations with their regulator[s] on the use of fintech and regtech” to “bridge the apparent disconnect between firms and their regulators,” according to a Thomson Reuters Regulatory Intelligence (TRRI) report.

Here we provide five tips as to how regulatory leaders at financial firms can approach RegTech adoption successfully. Consider these strategies as you look towards RegTech solutions in your firm—for both existing and future use cases.

  1. Identify key compliance challenges: Start by identifying the areas of your business where compliance processes are most time-consuming and resource-intensive. At hedge funds, private equity firms, and other investment groups, these may include anti-money laundering, know-your-customer (KYC) checks, and trade surveillance. For banks, these may include KYC compliance procedures as well as managing regulatory change processes.
  2. Evaluate potential solutions: Once you have identified these key challenges, research and evaluate potential RegTech solutions that can address them. Look for solutions that have a proven track record of success and align with your firm’s specific needs.
  3. Prioritize data privacy: With the rise in data breaches and privacy concerns, it is essential to prioritize data privacy when considering RegTech solutions. Ensure that any solution you choose adheres to relevant regulations and has robust security measures in place.
  4. Involve key stakeholders: Involve key stakeholders, including compliance officers, IT professionals, and business leaders, in the decision-making process. This ensures that all perspectives are considered and that the chosen solution is well-suited to meet all the unique needs of your firm.
  5. Regularly review and update: RegTech solutions are constantly evolving, and it is essential to regularly review and update your chosen solution. Keep track of any changes in regulations that may affect the efficacy of your RegTech solution, and be prepared to adapt accordingly. Partnering with providers who keep their technologies updated and are willing to adapt to your evolving needs can help.

Your careful evaluation and selection of RegTech solutions can ensure your firm stays ahead of regulatory requirements, keeps the cost of compliance low, and improves its risk management in the long term.

A Forward-Thinking Approach

RegTech may have its challenges—but with the right strategy, it’s likely the benefits of adoption will outweigh the potential drawbacks. The advantages will only grow as the technology matures. Partners and providers who evolve their technology and services with regulations and risks are perhaps your best bet. The right support will ensure you can manage emerging regulatory challenges even as you prioritize your business success.

Partner with Option One Technologies

At Option One Technologies, we offer tailored digital strategies and solutions that not only simplify compliance but align with all your other operational and business initiatives. Contact us today to learn more about how we can help you secure your digital future.