In recent years, two opposing phenomena have occurred simultaneously - on one hand, the unstoppable progress of the digital economy has caused deep disruptions in how certain sectors function and has led to the rise of new business models. On the other, the economic crisis that began with the bankruptcy of Lehman Brothers in 2008 interrupted the global trend towards deregulation in certain sectors, specifically in the financial and insurance sector, a situation that led to new and complex regulation standards.
The coincidence of the timing of this global economic crisis, along with the greater regulatory demands applied to banks and insurance companies, has caused the emergence of new technology companies under the new subsector of fintech: the RegTech.
In this post we will explain what RegTech is, what are its fields of application and how the future is presented for those companies that operate in this subsector that also uses technology to eliminate inefficiencies and facilitate legal and regulatory compliance in the digital era.
This post is also available in Spanish.
Context: the rise of the RegTech subsector
The two opposite phenomena mentioned in the introduction to this post are those that have caused the situation for the banks and insurers to change so much in the last 10 years:
- On one hand, startups are cutting the market shares of banks and insurers by operating in areas where regulation has not yet been applied.
- On the other hand, the new rules that emerged after the crisis, specifically to avoid a new global crisis, to strengthen the fight against money laundering, financing terrorist groups or stealing someone’s digital identity, require allocating large volumes of resources to ensure its rigorous compliance.
Large financial entities have provided on average up to 1,000 million euros in the past few years to meet the new regulatory requirements.
But just, what is RegTech?
The UK regulator FCA (initials for Financial Conduct Authority) defines RegTech - the union of the terms regulation and technology - as “the adoption of new technologies to facilitate complying with regulatory requirements”.
But its advantages go beyond the speed of compliance. RegTech technologies (forgive the redundancy) also provide the following:
Greater efficiency and lower costs dedicated to compliance.
Greater accuracy in regulatory compliance reporting.
Easier to proactively identify risks before a regulatory breach occurs.
Greater scalability of enterprise risk management systems.
RegTech is a subsector of fintech aimed at creating a win-win situation for regulators, entities subject to regulation, the entrepreneurial ecosystem and consumers.
Ultimately, more exhaustive regulations and a higher degree of compliance leads to greater security for consumers and a better corporate governance for companies that offer products and services. In sum, we all win.
Challenges, technologies and fields of application
The ideal evolution of RegTech requires a constant dialogue and a culture of collaboration between four key actors: regulators, entities subject to regulation, professional service companies that help these companies in their compliance procedures, and the ecosystem of RegTech companies.
Only collaboration will allow to take on challenges such as the legal restrictions in the use of data, the lack of standardization of information, the outdated reporting portals or to tackle regulatory uncertainty in specific areas.
To date, the technologies that RegTech provides for a more integrated and agile regulation are diverse. Some of them include: artificial intelligence and machine learning, big data, biometrics, blockchain, the visualization of data or the use of the cloud.
The latter is the base for a new concept: that of RaaS - regulation as a service - a new meaning for SaaS in which the solutions that companies use to comply with a certain regulation have the capability to automatically adapt themselves to the changes that may occur in that regulation.
The areas in which RegTech signatures are becoming popular include monitoring transactions, customer identification and verification, the development of predictive models or fraud detection. And some of the startups that are already making waves include Trulioo, Silverfinch, Passfort o Trustev.
The future of RegTech and the role of companies
In parallel with the growth of this ecosystem, some national regulators have already taken steps to recognize the contribution of these companies and to cement it on stronger bases: in 2015, the British FCA and PRA, for example, announced their intention to support the generalized adoption of RegTech in the United Kingdom.
From the company viewpoint, our responsibility is to ask ourselves to what extent we must adopt RegTech solutions, and that happens by answering honestly and urgently three fundamental questions:
- Does our company operate in a highly regulated sector, where failure to comply with its rules can pose grave risks?
- Do we have enough data on how well we comply with the regulations we are subject to in the different markets where we operate?
- Are we facing challenges and complexities in our attempt to establish a culture of risk management while complying with the norms in a solid and stable way?
If the answer to one or more of those questions is “yes”, the moment has arrived to move from theory to practice, and to begin to think about what RegTech solutions could help our business.
If you want to start using a solution that provides your company with legal and regulatory compliance regarding signing all types of documents and contracts, try our advanced electronic signature solution today: your customers will be able sign all types of normative documents from their smartphone, in any time and place, and with all legal guarantees established in the Regulation (EU) nº 910/2014, which is the European law that governs electronic trust services, one of which is the advanced electronic signature.
This post is also available in Spanish.
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