In the wake of the 2008 economic crisis and the subsequent recession that followed, there was a push to create new regulations to govern financial institutions in the United States. With these regulations came requirements that businesses had to follow to be compliant with the new laws. What followed the new regulations was a rise in companies offering services to help companies manage compliance easily and efficiently, both in time and cost. This is the purpose and application of RegTech.
RegTech, or Regulatory Technology, is more specifically the use of technology to manage regulatory processes within the financial industry. The goal of companies that offer RegTech is to use cloud computing, machine learning, and big data to drive automation and lift a majority of the burden of complicated compliance requirements of the compliance teams in businesses, to reduce human error, and accomplish difficult tasks more efficiently. As regulations become more robust and regulators are demanding more transparency in the forms of auditability, traceability, and automation, a company that is required to comply with a lot of regulations cannot easily subsist without some form of RegTech to help them avoid the risk of sanctions.
RegTech services help to compile large amounts of data in secured and compliant ways, as well as comb that data for risks to the organization. While these services affect the budget of a company, it is arguably canceled out by the amount of time and energy saved by simplifying the complex processes.
For example, let’s say a bank was previously doing all of their regulation audits manually, scanning the compliance law and solving what pertains to them, what they need to do, and how they need to do it to be compliant. While they could feasibly do this, it will take a considerable amount of time if the compliance officer tasked with this job is not a master of the laws pertaining to their enterprise. Then, following that long process, the bank will need to show the reporting, who did the reporting, when it was pulled, and keep the information secured.
This type of manual process is solved by RegTech. Not only will your data be secured, but it will also be accessible and timestamped, so you can demonstrate who complied, how they complied, and when they complied by logging all of the actions a user takes and creating a trail.
This is one example of how RegTech helps in a compliance situation, but it is also used by regulators to help reduce the time it takes to investigate compliance issues. While these are the more well-known aspects of RegTech, it also helps in many more categories within the financial sector, such as:
- Anti-money Laundering
- Risk Management
- Management and Control
- Transaction Monitoring
As the financial industry continues to rely more and more on data and technology, RegTech will continue to grow to keep up with the demand for more applications from companies and regulators alike.