A new paper published by the Financial Conduct Authority’s ‘Insight’ arm suggests it might be.
The paper asks whether the uncertainty created by the sudden arrival of the Covid-19 pandemic and its impact on financial services operations might speed the uptake of regulatory technology – regtech.
The progress of regtech and its role in improving compliance
In 2017, a report published by Juniper Research found that regulated firms were spending increasing amounts on regulatory technology to help them tackle a growing compliance burden, and estimated that spending on regulatory technology would grow from $10.6 billion in 2017 to $76.3 billion in 2022. We looked at the report’s findings at the time, in a blog exploring how regtech can help you improve regulatory compliance.
In 2019, the regulator published the findings from its Digital Regulatory Reporting (DRR) project, which investigated how technology could make it easier for firms to meet their regulatory reporting requirements – as well as improving the quality of information they provide.
It suggested that better use of technology could ‘provide clarity and create a shared understanding around rules and data through a collaborative platform’ that could tackle issues seen when firms currently send data to regulators, where ‘differences in interpretation often lead to confusion, duplication and inefficiency, which is costly in terms of time and money’.
Is now the tipping point?
As well as – and in many cases brought on by – global financial instability, the last few months have seen what the Insight piece refers to as a ‘rising tide of regulatory changes and rules updates’ – over 1300 globally in March alone.
In tandem, the move to remote working has forced companies to speed up their pace of digital transformation, creating new cyber risks as they scrambled to put in place home-working and remote operations. The FCA – like other regulatory bodies – has had to act quickly to respond to the crisis and consider how it might shape the future of regulation.
The challenges facing the market
This might all seem like a perfect environment for an explosion of demand for regtech. But the market is not without its challenges, summarised by the FCA’s article as ‘lengthy sales cycles, often complex integration with regulated firms’ IT systems and a lack of trust and experience between vendors and buyers’.
The trust issue is bound up with matters of security and confidentiality – by the nature of the work, regtech providers need access to firms’ most sensitive data and systems.
The fact that many regtech businesses are start-ups might also prove an issue; their funding, recruitment and cash flows are all being affected by the pandemic. And with many financial services firms now putting innovation on a back burner due to the economic pressures they face, there is a worry that some regtechs that were gearing up for growth may now not see the demand to justify their planned expansion.
In addition, a perceived lack of a unity in the regtech ecosystem may create a further potential challenge; there is – as yet – no industry representative body; no unified voice to help the regtech sector to work as one or to engage with regulators, policy-makers and businesses.
What benefits can regtech bring?
Although there are clear challenges, there are also many advantages of innovating around regulatory requirements. The automation of regulatory compliance processes can:
- Reduce costs
- Increase consistency of approach
- Improve the robustness of compliance processes
- Make the Compliance team more efficient and effective
Many of these benefits have been brought into sharp focus during the pandemic, with an increased risk of key staff absence through illness, redundancy or furloughing, and an increased pressure on firms to save money and drive efficiencies.
The FCA paper cites examples of regtech firms stepping up to help firms during the crisis; firms ’offering open access to tools to allow firms to maintain oversight of the dynamic regulatory environment and ensure their compliance’ and regtech firms co-operating with each other to help firms respond to the situation.
What next for regtech?
The FCA paper concludes by noting that ‘current developments caused by the crisis and the resulting regulatory, technological and behavioural shifts are a potential watershed moment for the RegTech ecosystem’.
While it believes that regulators have a key role to play in ‘ensuring that regulatory standards are maintained and that risks are contained, while also welcoming innovation and competition where it brings benefits’, the industry too must play its part.
Optimise the benefits of regulatory technology for your compliance processes
If this is a challenge your firm wants to take up, we’ve noted before that you don’t need to be a start-up to be a disruptor, and there’s nothing to stop financial services firms exploring innovation, including regtech.
If this is a route you’re going down – perhaps by introducing an element of automation to your compliance review processes , you will need to ensure you innovate in a compliant way.
How can we help firms?