Our Insights

The rise of regtech

How asset managers can draw on technology innovation to help meet growing regulatory requirements

As innovation in fintech continues to accelerate, financial services regulators, market participants and service providers are exploring how these new technologies may be used to help them keep pace with increasing regulatory complexities.

Regulatory technology (“regtech") is mostly focused on automating compliance obligations for financial services firms. While compliance solutions are not new, a growing abundance of market data and trading Application Programing Interfaces (APIs) have produced fertile ground for pioneering software that can simplify how asset management firms can meet their regulatory obligations.

“Increasingly, financial institutions are turning to technology to meet compliance demands, particularly with money laundering being such a high priority for regulatory bodies around the globe," says Morgan Self, managing director of Do Different, a UK-based management consultancy firm that works predominantly in the banking sector. “Regtech offers banks and financial institutions a vital means of keeping up with data-intensive regulatory frameworks."

Compliance focus

As regulatory measures become increasingly focused on data gathering and intensive modelling techniques, the administrative burden on compliance teams has increased in lock-step. While larger institutions often have the capacity to scale their operations, corporate compliance continues to be a significant hurdle for many asset management firms. If regulatory requirements are designed to avoid stifling market competition, they must adapt to the pace of financial innovation that technology is driving.

Managing systemic risk effectively means striking the right balance of transparency and accountability without hindering market activity

Lowering the barrier to market entry offers clear benefits to smaller firms, but for more established players, regtech also provides opportunities such as streamlining processes to reduce labour and consultancy costs.

Necessary balance

Asset managers may wish to initially approach these tools with caution or reluctance. In such a fast-evolving environment, they may opt to balance the expertise and familiarity of trusted service providers against the potential efficiencies of automated compliance solutions.

“The challenge is that what is available are tools, not solutions. And some of the tools are so sophisticated that only the largest, well-funded financial institutions can make best use of them," says Steve Goldstein, vice chairman of Opus Global, a US-based technology firm that provides compliance solutions to private equity and asset management firms. “These new technologies need to become services that can be easily deployed before they'll be able to democratize and increase competition in markets."

Policy dialogue

For regulators, these software solutions may prove invaluable for protecting markets which are growing in complexity. Regulatory bodies and central banks, often hampered by challenging policy directions, are keen to establish a dialogue with the firms pioneering these technologies. For example, the Australian Securities and Investments Commission holds regular Innovation Hubs where it engages with regtech firms as well as other international regulatory bodies to discuss the latest developments and policy proposals. Managing systemic risk effectively means striking the right balance of transparency and accountability without hindering market activity.

“Both regulators and private firms are already coming together. Compliance costs for market players have skyrocketed over the past decade, which has led to growing demand for software that streamlines compliance processes and reduces costs," says Goldstein. “At the same time, regulators are encouraging these technologies because they believe doing so will give them access to data that is more accurate, easier to analyze and can be used to reduce systemic risk."

Harnessing potential

Fintech is evolving to create a persistent state of disruption in the financial services industry. While market forces are experimenting with blockchains, robo-advisors and other emerging technologies, regtech is an approach aimed at better managing systemic risk through the automation of corporate compliance responsibilities and achieving greater levels of transparency. These tools clearly have enormous potential, provided regulatory bodies, market participants and private technology firms co-operate and strike the right balance between accountability, accessibility, and innovation.