Before Covid hit, RegTech was a central topic of discussion, with increasing numbers of conferences, webinars, roundtables, and column inches devoted to it. What might have been seen as simply an off-shoot derivative of FinTech undeniably became a multi-million-dollar industry itself. But why the apparent sudden interest in this topic? And will its momentum continue post Covid-19? In this blog I will be exploring how we at Torstone see the future panning out, as well as providing you with a checklist of the key attributes you should be looking for when making RegTech investment.

RegTech’s origin story

In the first decade of this century, most technological innovation and investment in capital markets was concentrated on the trading side. With eyes resolutely set on the bottom line, firms were keen to develop more innovative trading products and algorithms that drove revenue…until the global financial crisis (GFC) hit.

Very quickly focus shifted from a credit crisis to a compliance crisis. Failures of past regulations (or lack thereof) and the part this played in the financial crisis became front and centre of the industry’s collective attention. Unsurprisingly, this led to more firms dedicating significantly more IT budget for risk and compliance purposes and – just as surely as night follows day – a RegTech boom emerged.

But then, another type of crisis hit. One that we are still not over. So has this impacted RegTech’s progress? Quite the opposite in fact. If anything, it will only continue to grow and evolve into newer sub-categories, such as next generation risk management technology – aka RiskTech.

Post Covid-19 Tech

The need for RegTech is more pertinent than ever. The pandemic has caused banks to review their model risks, their data policies, and their analytics, quite apart from their working practices, in the face of an emerging ‘new normal’.

There is an even greater push now to get processes and systems into the Cloud to achieve greater efficiencies – and RegTech is there up front.

There will be further evolution of artificial intelligence (AI) and machine learning (ML) as institutions continue to tame and manage big data to deliver compliance and more informed analytics. Also, further iterations and recalibrations of stress testing and the additions of new scenarios in regulatory tests will certainly be on the cards. Another huge area of consideration will be around IBOR, FRTB, CRR 3, and Basel IV.

While firms were granted some respite around these deadlines during the pandemic, the pause button is no longer pressed and will have many a firm asking some pretty crucial questions such as ‘Will our pre-pandemic ICAAP hold up?”, “Is it time for some reverse stress tests?”, “Are the objectives still achievable?”.

Additionally, the newly promoted hot topics of climate change risk as well as sustainability are factors that will need due consideration too. The pandemic has depleted banks’ balance sheets, which will be further damaged by the capital charges imposed on them by the regulations. Perhaps RegTech will offer solutions that provide optimisation algorithms to make the most of what is left!

What to look for

There is certainly a lot on the plates of Risk and Compliance Managers, CDOs, and Managing Directors, and it has been made clear that RegTech will help them achieve what they need to quickly and efficiently. However, we cannot ignore the fact that as we still emerge from the pandemic, any IT spend will be closely scrutinised. You need to ensure any RegTech solution you invest in gives you the biggest bang for your buck. To help you navigate these waters, we have devised a checklist to help make sure the solution is future-proofed and fast enough for the new normal.

Is the proposed RegTech solution:

• Cloud native?
• Able to cope with big data?
• Able to help you recalibrate your models?
• Equipped with a tool to cope with all your stress testing needs?
• Able to provide answers to data lineage problems?
• Able to provide regulatory reporting? And if so, is it flexible enough to cope with the further fine tuning of regulations by the supervisory bodies as and when they occur?
• Built using a technology-first strategy, incorporating AI and ML?
• Built with the scalability and utility of cloud-based services, sewn together via open APIs?

The regulatory compliance nirvana

RegTech strengthens collaboration between financial organisations, vendors and regulators. What banks are crying out for – what they call the ‘holy grail’ – is an all-encompassing solution that covers many, if not all, regulations, under one umbrella while maintaining the ability to evolve with the changing directives. This kind of solution makes compliance much easier, centralises control and gives greater regulatory oversight. There is a strong possibility that we will see such an integrated landscape solution in the future.