RegTech, a subset of fintech services, was introduced by the UK’s Financial Conduct Authority (FCA) in 2015. It focuses on technology that may help deliver regulatory duties more swiftly and effectively than present capabilities. It might be outlined as any technology that ensures organizations follow their regulatory criteria.

The cost of complying has increased due to the regulatory environment becoming more complex. Regulators have also levied hefty fines for noncompliance. According to CB Insights, firms have paid $321 billion in fines since the 2008 financial crisis. Businesses are looking for ways to reduce their risk of noncompliance in this circumstance.

RegTech uses various cutting-edge technology, including artificial intelligence, big data, cloud computing, and machine learning, to guarantee that organizations are more effective in achieving regulatory compliance. RegTech has decreased the likelihood of human error by automating operations.

What is RegTech?

If you have ever wondered, ‘What is RegTech?’, think of it as ensuring businesses achieve regulatory compliance by utilizing various cutting-edge technologies, including artificial intelligence, big data, cloud computing, and machine learning. By automating the processes, RegTech has reduced the possibility of human mistakes.

To meet the demand for better and more efficient regulation of companies, particularly financial firms, new regulatory tech startups are creating solutions to assist businesses in enhancing compliance, lowering risk, and simplifying operations.

Additionally, RegTech companies may help enterprises avoid fines for non-compliance by keeping them informed of the growing regulatory and compliance requirements. RegTech may be essential in anticipating and preventing the ensuing financial catastrophe if early adoption of the technology persists.

Industry Overview

The number of rules has resulted in a more extensive surface area for compliance gaps. Businesses already have limited resources because of the need to adhere to present regulatory requirements. RegTech software is reducing the backlog by digitalizing compliance activities.

The regulatory system has tightened up due to new legislation and more regulators. Regulators appear to stay within their criteria, particularly concerning recent risk incidents. Businesses may benefit from RegTech companies’ ability to expedite compliance processes and reduce the room for error.

The capability of the present infrastructure cannot handle regulation. The existing infrastructure is built on obsolete code, is challenging to modify, and falls short of the technical requirements imposed by regulators. The new regulatory requirements are evolving to become more complex and data-driven. Businesses are looking to RegTech solutions for more scalable, more reasonably priced options.

Now, solutions are improving the present procedure. The next generation of regulatory technology will leverage cutting-edge technologies like machine learning, natural language processing (NLP), and blockchain to replace out-of-date laws and procedures.

RegTech Causes

Here are some key elements driving the development and adoption of RegTech, along with several well-known businesses bridging the gaps.

The government appears to have yet to make any immediate plans to ease the burdensome constraints that the financial services, healthcare, and other significant industries presently suffer.

The regulatory calendar outlines the key regulations to pass over the next five years. However, the list may grow if other laws pass.

The weight of increasing compliance requirements is on incumbents, who still mainly employ manual methods.

In the years following the financial crisis, hiring more people to handle audit, risk, and compliance — the critical control duties of a company — was the quickest solution. Due to the scarce resources and small pool of expertise in these fields, this method is not sustainable. Nowadays, instead of adding additional employees to the problem, firms are attempting to digitize and automate laborious processes.

Regulators now have more power due to laws like the Wall Street Reform Act and Dodd-Frank. Oversight has increased due to the creation of new institutions and initiatives, such as the Consumer Finance Protection Bureau (CFPB), which was established to protect consumers.

Because different regulators have different regulatory responsibilities, they create their standards, many of which overlap, which makes compliance more difficult. RegTech may assist businesses in avoiding fines for missing requirement deadlines and streamlining the regulatory environment by creating dashboards to handle rules and requirements.

The Need for Standardization

Because the regulatory framework is complicated, businesses ask authorities to converge the regulations. In response, authorities have begun collaborating with startups and among themselves.

Regulators are forming working committees to help unify laws and improve cross-education. They have also started to advocate for the internal adoption of new technology.

One effective outcome has been the creation of internal sandboxes like the CFTC Lab and the CFPB’s Project Catalyst to provide resources and promote technological innovation within the industry.

Is Blockchain Technology the Solution?

A decentralized asset management and investment platform offer tools for developing financial DApps and smart contracts that allow for open user collaboration. Blockchain is one of the technologies driving the RegTech revolution.

Because of its numerous potential benefits, such as more transparency due to a distributed ledger, speedier and more affordable automation, more robust security through encryption, and enhanced record-keeping, RegTech businesses employ blockchain technology for many use cases.

The Anti-Money Laundering (AML) and Know Your Client (KYC) rules for customer onboarding are the natural choice when addressing use cases for blockchain implementation in RegTech. It’s easy to understand why so many companies try to enter this market: All financial institutions must first collect their information about prospective customers before conducting business with them.

This information must also be updated often for existing counterparties. It should go without saying that this is time-consuming and costly in terms of both resources consumed and funds invested. The ideal solution is a universal ledger that all banks can use to log transactions and identify their clients. When you examine the ongoing struggle between the many blockchain consortia striving to establish common standards, it is clear why it is difficult to achieve.

Conclusion

The RegTech solutions that are now gaining traction with consumers frequently cooperate. These technologies increase productivity by digitizing and streamlining processes.

Blockchain, AI, machine learning, and natural language processing will be used in the forthcoming wave of innovation in the regulatory technology industry to replace current processes and workforces fully. The assurance and compliance of the blockchain may benefit from RegTech. A distributed ledger audit trail is being created using blockchain-based one-way RegTech.

Future regulatory compliance laws, procedures, and technology could all be fully automated and replaced. Supporting firms in their move from passive to proactive regulatory interpretation and response may be the immediate result. RegTech solutions would eventually reduce the amount of human or centralized involvement required by businesses and even regulators.

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