Banks and regulators have been facing an uphill task of actively managing and dealing with complexities of regulatory compliance. The ongoing pandemic has added onto existing efforts in terms of increased fraudulent activities and varied security risks, which has further accelerated and catapulted the adoption of regulatory technology solutions.
Regtech is expected to account for 40% of the global compliance spend by 2023. The technology is continuing to evolve and emerge as cloud-based solutions available as a service, which provide cost advantages. These solutions also have advanced analytical and machine-learning capabilities that can provide meaningful insights on varied data sets.
Many financial services providers are heavily invested in legacy technologies, which are not agile and nimble enough to meet the stringent, complex and evolving regulatory changes. Regtech has emerged as a preferred option, as it can be seamlessly integrated with existing technologies while providing the necessary edge in terms of managing complexities and timely compliance.
Also driving regtech adoption are:
Data agility: Most financial services firms have vast amounts of data and are sitting on a wealth of information which can be obtained from the data sets, Cluttered and intertwined data sets can be unbundled and organized through Regtech solutions.
Analytics: Regtech not only has the capacity to process large volumes of data, but can also carry out complex analyses resulting in huge productivity gains, along with providing actionable insights that can generate further efficiencies.
Increased crime: The pandemic has resulted in a surge in money laundering and other fraud-related activities. Regtech solutions powered with artificial intelligence capabilities can help banks quickly flag suspicious activities and complex cases of money laundering.
A successful regtech strategy focuses on an enterprise-level adoption, rather than just having a narrow regtech solution for certain use cases. Banks are constantly being introduced to new regulations, launching new products and expanding their geographical reach, so they should follow an operating model that employs regtech solutions that are able to integrate seamlessly, can evolve and are also globally scalable.
While regtech brings a host of potential benefits, they come with certain challenges as well. Many financial institutions worry that they may end up managing multiple niche regtech solutions – this can be addressed by choosing solutions that can be used for multiple use cases. Another key area of concern is that most of the newer regtech solutions are cloud-based, creating hesitancy about sharing sensitive and confidential data. With advanced security protocols, however, this challenge too can be mitigated to a great extent.
In the area of risk and compliance, there are a host of use cases where regtech can seamlessly fit in.
Regulatory reporting: Automated and insight driven reporting enabled through Big Data, cloud and machine learning
Risk management: Leveraging regtech to detect risks and create early warning solutions, powered through advanced analytical engines, to assess, mitigate, respond and anticipate future threats.
Cybersecurity risk: Preventing cyberattacks via a robust cyber-risk mechanism powered by a host of technologies, including AI, Internet of things (IoT) and cloud.
Compliance: Regtech can monitor current state of compliance and create impact analysis of future regulations on bank processes, data and technology landscape.
While the above are broader areas for regtech adoption, there are numerous use cases under each of the areas that present potential rationale for regtech adoption. Regtech will continue to grow and build on the gains it has made so far and will further mature by incorporating the lessons learned so far.
In recent years, there has been good participation from regulatory bodies in encouraging regtech adoption. In the United Kingdom, the Financial Conduct Authority (FCA) is spearheading the Global Financial Innovation Network (GFIN), which acts as a network of regulators to collaborate and share innovation experiences in their respective markets.
Regtech is no longer a buzzword. It is a reality that will continue to evolve and grow in the financial industry with the ever-increasing demands of the regulatory world.
Raghu Mahadev is head of risk and compliance solutions and Ajay Katara is a banking risk management consultant, both at Tata Consultancy Services.
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