Reg-Tech: Looking foward

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Stemming from financial service providers appetite for efficient systems to handle new and complex regulatory and compliance demands, the volume of applying technology to manage risk and compliance has grown drastically. Since the GFC, regulators have implemented complex and extensive regulatory requirements which have driven the expansion of IT and compliance in the financial industry globally. Firms are beginning to adopt systems supporting centralised risk management and compliance functions to adapt to the changed regulatory and compliance environments.

While FinTech slowly embraces the monetisation of data, the regulatory framework for the finance industry will need to be modified to cover unnecessary approaches such as data sovereignty and algorithm supervision. The development of FinTech is in need to be built around a new framework called RegTech.

The following identifies how RegTech should be moving forward:

  • Regulators ability to process an increased amount of data suggests that financial regulators need to take a coordinated approach to support RegTech development
  • There will be a progressive prediction underway in how FinTech and RegTech are evolving, where there will be a paradigm shift from a KYC (Know-Your-Customer) approach towards a KYD (Know-Your-Data) approach, which will rise a few years in time
  • Financial firms will continue to promote the design of a regulatory framework able to adapt dynamically to new rules and regulations in support of governments
  • Balance will be needed to assess what is worthwhile when it comes to fully automating regulatory and compliance systems, therefore the RegTech industry will continue to re-invent itself
  • Although post-crisis regulatory requirements are still evolving, in the future IntelX expects that the next financial crisis will add extra layers of requirements and complexity
  • Companies will continue to develop new business models which could in turn generate unexpected risks

The argument for cost reduction within compliance is very strong, and RegTech looks particularly beneficial for firms and regulators alike. While RegTech is developing to enable firms to better control risk and costs, we will see the truly transformative potential of this industry looking forward.

In summary, for the past 50 years the application of technology within regulation has changed drastically:

  • Pre-2008: RegTech 1.0 – a paradigm severely damaged by the GFC
  • RegTech 2.0 – the combination of new regulatory obligations and technology to facilitate and streamline compliance

IXT is beginning to see certain elements of new RegTech 3.0 emerge, with technological progress changing both market participants and infrastructure with a shift from a KYC mindset to a KYD approach.