RegTech: a step in the right direction

It’s clear that technology now plays a fundamental and increasingly prominent role in improving the financial products that banks offer their customers.

In late 2014, the Financial Conduct Authority (FCA) launched its Project Innovate, which aimed to promote competition through disruptive innovation.

Due to its success, the FCA announced in 2015 that it will explore how regulatory requirements and technology can come together through RegTech.

In the FCA’s feedback statement, published in July, the regulator defined RegTech as a ‘sub-set of FinTech’ with a focus on the technology that could potentially facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.

In recent years, Fintech has dominated the headlines and has proven to be more than simply a novelty, enabling traditional financial services firms to innovate and thrive in the competitive global market.

RegTech looks set to follow in its predecessors’ footsteps and seeks to take advantage of a gap in the financial services sphere by creating a more efficient and effective way of dealing with regulation.

>See also: Is FinTech really a game changer?

This innovative technology marks a step in the right direction for the UK financial sector and will help firms to understand and manage any potential risk much more effectively, and also enable them to capture and store the data they need to produce in order to appease the regulator.

That said, although it is great to see the FCA show its support for innovation, there is still work to be done.

Navigating the path to successful compliance

Increasing levels of regulation and more challenging regulatory expectations are having significant operational impacts on firms requiring people, process and technology based solutions.

Regulation and compliance rules are changing all the time, which can create challenges for firms to understand, implement and embed the new requirements.

For example, at the moment, most banks are using the ‘three lines of defence’ approach, and for innovation, the second-line (compliance and risk function) forms the biggest threat for both fintech and banks, but for opposite reasons.

For banks, innovation has been hindered by strict and ever-changing regulation. Whereas for firms operating within the fintech space, a lack of guidance and tailored regulatory framework has stalled their ability to flourish.

Both positions bring their share of challenges, and the regulator is increasingly recognising that it plays an important role when it comes to educating and bridging the gap between firms and innovation.

>See also: How FinTech is finally transforming the financial world

As such, in order to ensure that the right balance of innovation is implemented while simultaneously protecting the consumer, the FCA has supported the development of RegTech to transform the way companies manage their customer due diligence and change how regulatory measures work.

By automating due diligence, technology will help businesses tailor their data to reflect how the company manages its risk.

Promoting dialogue and collaboration

Not only will RegTech help firms define standards and guidelines to provide more certainty when purchasing new technology capabilities, it will also free up large sums of operation and capital expenditure that businesses are currently using to ensure ongoing compliance maintenance and demonstrating compliance during an audit.

By adopting technology, firms will be able to view their compliance on a continuous and real-time basis.

Firms ensure that they are compliant for an audit, however, from the moment it is completed, the firm is susceptible to risk again. A spin off from this is the speed in which firms can shift changes in the environment, specifically in the digital estate realm.

If firms have the right technology built into their delivery to check compliance, they will essentially be able to deliver this process faster.

However, the complexity, scale and diversity of legacy infrastructure and existing systems within some financial services firms make the implementation of new technologies challenging.

In fact, responses to the FCA’s call for input were criticised by some firms, suggesting that uncertainty over regulations, the stance of the regulator and credibility of unproven technology, were making firms cautious about rolling out RegTech more widely.

>See also: Blurred lines: traditional finance vs. fintech

This highlights the need for firms to look to their IT providers for expert advice and assistance.

Complex regulations mean that many firms still do not feel comfortable adopting new technology. In particular, smaller firms are likely to be unfamiliar with the technology and the compliance requirements, and should therefore seek specialist expertise from an experienced advisor in order to gain the greatest benefits from RegTech.

That said, for firms to reap the full benefits of RegTech and understand what is required in practical terms, the FCA will need to also think about releasing some real-life examples through case studies.

Although it is encouraging to see that the FCA is producing guidance, real-world scenarios to establish how regulation should be tackled to achieve seamless compliance that has minimal impact to the firm’s operations.

After all, it is the unintended consequences that catch firms out, and we cannot always predict them until it is too late.


Sourced by Jon Williams, chief technology officer at Niu Solutions

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Nick Ismail

Nick Ismail is a former editor for Information Age (from 2018 to 2022) before moving on to become Global Head of Brand Journalism at HCLTech. He has a particular interest in smart technologies, AI and...

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