Regtech: tapping into the compliance goldrush

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Regtech has emerged as the golden child of the fintech age. The sector has already proved pivotal to aiding regulatory compliance and is increasingly focusing on artificial intelligence (AI) to alleviate what has become a notoriously resource-intensive activity for banks and the buy-side.

With huge fines levied on banks and other institutions that fail to meet regulatory standards hitting the headlines on a regular basis – the issue of compliance is now very much front and centre of the agenda.

Perhaps unsurprisingly, compliance budgets have spiralled. According to the Financial Times, big banks such as HSBC, Deutsche Bank and JPMorgan spend well over $1bn a year each on regulatory compliance and controls, with BBVA estimating that, on average, institutions have 10 to 15 per cent of their staff dedicated to this area.

Thomson Reuters’ seventh annual Cost of Compliance Survey served to confirm the issue. “More than two-thirds of firms (69 percent) are expecting an increase in their compliance budget this year with 15 percent expecting significantly more.  Systemically important financial market utilities (G-SIFIs) are expecting a similar increase in compliance team budgets with 17 percent expecting a significantly higher budget.”

And this is only expected to increase, with major pieces of legislation such as MiFID II set to come into force in 2018. Reporting, internal controls and governance and derivatives reforms are all on the agenda posing challenges for cost-conscious institutions already focusing on keeping up-to-date with the latest technology.

A report from the Institute of International Finance (IFF) identified seven key areas where regtech should be utilised to solve compliance problems.

  1. Risk data aggregation
  2. Modelling scenario analysis
  3. A bottleneck in monitoring payments transactions
  4. Identification of clients and legal persons
  5. Monitoring a financial institutions’ internal culture and behaviour
  6. Trading in financial markets
  7. Identifying new regulations

This fledgling industry has responded proactively – innovating around a number of key areas such as cloud computing, blockchain, machine learning, APIs and cryptography.

Real-time automated trade monitoring, driven by AI, has also become a key tool for banks and the buy-side to evaluate trading behaviour and quickly identify abnormalities. And the principal is increasingly being applied to automated trading strategies as well.

But as the Financial Times note in a recent piece on the regtech sector, the real value delivered by providers is in “modelling, scenario analysis and forecasting”. But sometimes, this is easier said than done with the UK’s imminent exit from the European Union is set to complicate compliance matters further.

With a myriad of upcoming regulatory measures under MiFID II, Basel III and AIFMID likely to translate into growing demand for regtech solutions that will enable financial institutions to focus on their core business – it is certainly a sector worth watching closely.