Regtech (n). Short form for the regulatory technology being created to meet regulatory monitoring, reporting and compliance.
Regtech is booming, with USD 2.99 billion invested globally across over 400 private investment deals in the last five years.
Yet despite its predominant position in almost all other areas of financial technology, the UK is still lagging behind the US when it comes to regtech investment.
Just 9% of the almost three billion invested since 2012 went to UK based companies, according to the CB Insights figures. This put it a distant second behind the US, which scooped up 78% of the total investment.
Banks are looking to reduce costs to cope with a tougher investment market and find ways to handle the flood of new rules which the January MiFID II deadline will unleash. In this environment, it is little wonder investors see the potential for technologies which promise to make compliance easier, more efficient or more reliable for the financial sector.
UK regulators appear to have spotted the opportunity as well, and the Financial Conduct Authority (FCA) is looking to do what it can to help the UK’s regtech sector catch up with its transatlantic counterpart.
The regtech industry spans a wide variety of technologies and the industry which promises to make compliance easier, more efficient or more reliable. Some companies are using artificial intelligence to help banks comply with regulation, while the R3 group of over 40 banks is looking at how distributed ledger technology (DLT) can make reporting to regulators simpler.
Some regtech firms believe that Brexit could be a big boost to the UK’s regtech industry. With the UK’s financial sector’s relationship with the EU now in flux, both in terms of regulatory equivalence and cross boarder trade, ““Brexit is a brilliant opportunity”, sais Diana Paredes, CEO of regtech start-up Suade.
The UK regulator, the Financial Conduct Authority (FCA) has also been working to encourage the UK regtech sector. The FCA’s executive director of strategy and competition, Chris Woolard, is keen to stress the role regtech companies can play. Talking to Financial News, he said, “It’s something quite positive where firms are taking quite seriously how they apply technology to their own compliance question.”
The FCA has also been leading the way when it comes to nurturing innovation. “There are other regulators around the world that have more funds and resources, and other regulators with more powers. But it was really only the UK financial regulator that has built into its governance a mandate to promote innovation and competition, as well as the traditional mandates of financial stability and consumer protection,” Imran Gulamhuseinwala, EY’s global leader for fintech, told the Financial Times.
Most notably, in 2015, the FCA launched its ‘sandbox’ to help companies developing new technologies. The sandbox allows banks firms which require regulatory approval before being able to operate their technology to test in a live environment. This allows firms which would otherwise need to develop their full technology and achieve FCA approval before fully testing their product, to develop their technology in a way which is responsive to both the FCA’s requirements and the demands of live operation.
So far, the sandbox service has proved popular with 69 companies applying for the first cohort in 2015 and a further 77 applying for the second cohort, according to a recent statement from the FCA. Following the success of the first cohort, the FCA has begun helping regulators across the globe to develop their own sandbox programmes, including in Japan, Canada and China.
It is heartening to see the UK regulator supporting this process and creating an environment where the next generation of firms who using technology to enhance the regulatory environment and reporting/confirmation/validation processes.
Financial markets have been buffeted by scandal and repetitional damage of late. It is time to programme some trust into the source code.