The Rise of RegTech for Capital Markets

Posted by Torstone Technology on Nov 7, 2017 10:00:00 AM

RegTech has really emerged as its own space within the financial technology sector and beyond, and it is commanding a lot of attention. We’ve seen this firsthand at Percentile, from how it has become a central topic of discussion and with increasing numbers of conferences devoted specifically to RegTech. But what is it? How and why has it become so prominent, seemingly all of a sudden? And why should organisations in capital markets care?

These questions have been asked and answered a number of times over recent months. What I feel is the more interesting question is: where is RegTech going? This is what I discuss here, based on countless conversations that I’ve had with various stakeholders in the market, at conferences we at Percentile have attended, and from my own thoughts.

Just briefly though, what is RegTech?

RegTech is seen as an offshoot of FinTech, but in reality it reaches well beyond the financial sector. While FinTech enables new business models for financial services, RegTech enables new operating models for financial organisations. By using technology and automated processes, banks and financial firms can use RegTech to be compliant by default.

The sharp increase in regulation since the global financial crisis of 2007-08 has created challenges for organisations, as true compliance requires the right people, capital investment and time. Technology empowers organisations to meet these compliance challenges more effectively, in less time. RegTech is the use of new technologies to solve the challenges of regulatory compliance.

The technology is now available to help banks and financial companies with the seemingly endless surge of regulation, much of which is complex and can present formidable tasks for the parties concerned.

Where did RegTech come from?

Most technological innovation in capital markets, up to recent times, has been on the trading side, to develop more innovative trading products that drive revenue. But, in the post-crisis world, we have seen focus shift from a credit crisis to a compliance crisis, zoning in on the failures of regulatory protocols and the part they can play in financial crises.

Since the 07-08 crisis, regulators have focused on the financial sector from all angles, not least around capital adequacy, conduct and market structure. However, investment in technology at banks and other financial organisations did not keep pace. This may explain at least in part why financial firms have struggled to comply adequately with certain regulations.

The lack of investment in regulatory technology and rise in the number and complexity of regulatory protocols then opened the door to the emergence of technology-led solutions focused on more robust, efficient ways to achieve compliance.

What is driving RegTech’s growth?

The demand for technology-led solutions rather than human resources is what is advancing the march of RegTech.

Banks want to focus on doing banking well, but following the financial crisis and the tsunami of regulation over the last decade, they don’t have the resources they once did to develop their own technology.

This has created a gap in the market and it is being filled by externally funded RegTech companies. It means that not only are banks and financial companies willing to look outside their own walls; they must. And because RegTech firms are wholly focused on improving compliance processes, banks can access technology-driven solutions that are better and faster to market than they can develop themselves in isolation.

The compliance holy grail

RegTech strengthens collaboration between financial organisations 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. It would make compliance much easier, centralise control and give greater regulatory oversight. There is a strong possibility that we will see such an integrated landscape solution in the future.

What’s happening in the RegTech market?

As seen in some research shared by Citi, the UK and US are leading the RegTech charge in terms of innovation, whereas China is leading on investment in the sector.

An interesting tidbit from a banker’s conference speech I recently attended was that she sees RegTech firms as tackling the more straightforward aspects of banking regulation. These aspects are of course required but they’re not so difficult to comply with. There is however a steady increase of firms that are using artificial intelligence and machine learning to meet the more complex compliance challenges.

What’s next for RegTech in capital markets?

Currently, RegTech in capital markets is focused on conduct, compliance and capital. The most important regulation right now is MiFiD II. Banks and capital market firms are racing to be compliant with it in time for the 3 January 2018 deadline, but worryingly it doesn’t look likely for many.

Following MiFiD II, other regulations will come into focus, including General Data Protection Regulation (GDPR) and Payment Services Directive 2 (PSD2).

For banks with trading books, the Fundamental Review of the Trading Book (FRTB) will require them to break down siloes; have a more scalable flow of data and risk computation between front office, risk and finance; and significantly improve risk aggregation capabilities.

Implementing connectivity and transparency between systems is an objective that firms must continuously work towards, which is difficult. But in their continued absence, banks and financial firms have to repeatedly go back and start from scratch for each new regulation.

RegTech is Rising

If the number of conferences is anything to go by, RegTech seems to be the hottest ticket in town. Attending these are not just the compliance officers, but risk and technology leaders too. They see machine learning and artificial intelligence as tools being incorporated to employ a technology-first strategy for regulatory compliance. The scalability and utility of cloud-based services that are sewn together via open APIs is also a hot topic. As regulatory experts are teaming up with innovative technology, collaboration between RegTech companies, regulators and financial organisations is seen as a key path to success. There is a lot of work to be done, but it is certainly an exciting space to be part of.

What we do at Percentile

At Percentile we develop technology to solve multiple risk-based regulations for financial firms operating in capital markets. 


Topics: RegTech, Capital Markets