For nearly a decade, financial institutions have been making only limited headway in cutting the cost of complying with increasing post-crisis regulation. That may be changing. RegTech startups use emerging technology to help firms address risk and regulatory challenges. From speeding loan origination to sharpening surveillance against fraud, money laundering, and insider trading, financial institutions now look to RegTech to improve efficiency and lower risks.
RegTech goes mainstream. RegTech has grown rapidly, and it’s no longer reserved for the early adopters. With more than 250 providers, it has become a mainstream resource. In 2017, we saw firms move from proof-of-concept projects toward broader scale adoption. In particular, firms have spent heavily on tools for market abuse surveillance and regulatory affairs management.
New tools for oversight. Many regulators view RegTech as a way to strengthen oversight by highlighting threats to market stability. In 2017, the US Commodity Futures Trading Commission (CFTC), launched LabCFTC to spark innovations improving the “quality, resiliency, and competitiveness” of markets. And, the Office of the Comptroller of the Currency (OCC) now has a team working on innovation and reviewing issues related to granting national bank charters to FinTech companies. We also saw infrastructure providers such as securities exchanges buy (or partner with) RegTech firms.
Big potential lures big players. Several large financial firms have created venture capital teams to invest in RegTech and promote internal adoption of the innovations. These groups were quite active in 2017, and their share of the total capital channeled to RegTech has steadily grown. It’s a stamp of approval that bodes well for widespread adoption of the technology.
Gathering speed. We expect RegTech adoption to accelerate in 2018. Look for continued interest in areas such as financial crime surveillance (identifying bad actors), consumer compliance, scenario modeling, and enterprise risk management. Regulators see the technology’s potential to reduce systemic risk and improve financial stability. And while they’re unlikely to endorse specific technologies or common standards, look for them to allow firms to test and learn, and then assess how RegTech is being used.
Huddle up. We anticipate consolidation of and new partnerships among RegTech companies in 2018. Financial industry buyers generally want integrated offerings with advanced customer support, but most RegTech startups currently offer narrowly focused solutions.
Regulators on the bandwagon. We expect financial regulators in 2018 to expand their own use of RegTech. Emerging technologies like robotic process automation can help agencies process filings more efficiently. Artificial intelligence can be used to help identify misconduct and insider trading. This is especially important given the obvious resource constraints.
Pilot, pilot, pilot. It’s tempting to direct your compliance team to just “plug in” a RegTech solution. Don’t. Instead, explore a few spots where you think RegTech will pay off, can be deployed quickly, and where new risks are unlikely. Choose a specific use case to address. One area to consider? Technology that improves workflow in regulatory reporting.
Know the roadblocks. Many issues can derail a RegTech integration, whether it’s outdated technology, uncertainty over alignment with existing regulations, or passive resistance from staff. Your team working on a corrective action plan with a tight deadline, for example, won’t be open to conversations about process enhancements. Be aware of the resistance and obstacles you’ll face, create an open dialogue, and work toward a common goal.
Act, don’t react. Financial firms are finally finding room to breathe after a decade of new regulations, but don’t expect the break to last. From the top down, pressure is building to deliver cost savings and reduce risks further by using technology. Executives also expect that insights gathered from compliance will help other areas of the business, and this requires a completely different mindset. Use RegTech strategically. It can address these needs and others.
“RegTech isn’t just adding technology to existing processes. It can change the way you think about regulatory compliance. Once you understand its transformative potential, you may find ways to create a competitive advantage.”
PwC's Mike Alix and David Choi describe how financial firms can reduce regulatory costs by adopting RegTech. They note that more than 250 start-ups are providing firms with ways to streamline regulatory functions ranging from crime surveillance to compliance reporting.
PwC's David Choi describes how US agencies are setting up in-house offices for RegTech innovation and exchanging information with the financial industry.
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US RegTech Leader, PwC US
Tel: +1 (646) 471 6748
US Financial Services Advisory Regulatory Leader, PwC US
Tel: +1 (646) 471 5806