Technology is helping banks and other financial institutions meet the ever-growing demands of global regulations.
In banking and finance, regulation only travels one way. Financial institutions have always been subject to laws aimed at preserving the integrity of the financial system and protecting customers. The number of those laws has increased significantly in the decade and a half since the financial crash.
Today, the regulatory landscape is going through another period of accelerated growth. Globally, governments see their financial service sectors as the new frontline in the fight against financial crime, tax evasion and even terrorism. Meanwhile, regulations around data privacy and cybersecurity are getting tighter as financial services increasingly move online.
In an effort to meet these ever-growing demands, financial institutions are turning to technology.
Financial compliance teams are stretched
It’s easy to see why more robust regulation is necessary. The UK government calculates that money laundering costs the economy more than £100bn every year, while the IMF estimates that between 2-5% of annual global GDP is laundered.
But while it may be understandable, new rules often heap extra responsibility onto the already-stretched compliance teams of banks, fintechs and other financial institutions.
Anti-money laundering (AML) and counter terrorist-financing (CTF) measures can be hugely complicated and costly. Know Your Customer (KYC) and beneficial owner requirements add to the complexity of due diligence procedures.
This is where regulatory technology (regtech) comes in. Put simply, regtech is technology that helps financial institutions meet their regulatory obligations. It can streamline systems and processes around compliance, regulatory reporting and risk management.
Automation, AI and machine learning in banking
At their most basic, regtech solutions create efficiency savings by automating previously manual data gathering or document scanning processes. At a higher level, they use machine learning (ML) and, increasingly, AI, to find a needle of valuable information in a thousand haystacks of mundane data.
Regtech has the potential to dramatically streamline the compliance procedures of financial institutions in a number of ways. Benefits include:
- Transaction monitoring. Regtech platforms analyse financial transactions in real time, singling out unusual payments for further investigation.
- Know Your Customer. Regtech uses advanced data analytics to help businesses verify customer identities.
- Horizon scanning. Regtech solutions scan the global horizon for new laws and updates that might affect client businesses.
- Centralising information. Regtech platforms identify the regulations applicable to any entity and draw down relevant documents from regulator repositories into a centralised database.
This is scratching the surface of what regtech can do, but in every case it improves accuracy at the same time as reducing the pressure on human teams. The technology’s potential has already led to considerable investment. Recent research from Juniper forecasts that spending on regtech will exceed $200bn by 2028.
Regtech is booming, and understandably so. But implementation comes with challenges as well as opportunities. In one recent Thomson Reuters study, nearly half (47%) of respondents said they had to widen skill sets within risk and compliance functions to make the most of new regtech technologies.
This is most obviously done with fintech courses that lead to recognised regtech qualifications.
Financial institutions need to invest in new digital skills to make the most of this emerging technology, which will only get more sophisticated over time. At the same time, professionals with the digital skills to maintain and operate regtech systems will be in high demand as the technology proliferates.
Regtech has become a necessary investment for financial services firms as their regulatory responsibilities multiply. Those with the systems and skills to exploit it fully will reduce their risk of compliance missteps and create real competitive advantage.
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