Financial institutions are no stranger to regulatory compliance, but what is RegTech? A simple explanation is regulatory technology designed to help financial institutions and other businesses mitigate and reduce the risk of non-compliance with regulatory requirements.
RegTech is most closely associated with the FinTech industry due to the large number of compliance processes that need to be met. However, while RegTech may have gotten its start serving the financial sector, today, RegTech solutions are being employed in a variety of sectors that face compliance and regulatory requirements, including healthcare, government, tech and cybersecurity, and more.
In this post, we will explore what RegTech is in greater detail, understand why this technology has gotten more important and popular over time, and highlight the benefits of RegTech solutions.
Most definitions of RegTech explain that this technology is a tool used by financial institutions and FinTech firms to reduce regulatory risk and minimize the costs of compliance issues. While this definition of RegTech may have been accurate once, it is now much too narrow to adequately portray the importance of these technology solutions.
As of 2021 and beyond, a more accurate and modern definition of RegTech would be technology solutions used by businesses and regulators to ensure regulatory compliance, increase efficiency, and reduce compliance costs.
RegTech solutions are employing high-end tools like Artificial Intelligence, Machine Learning, natural language processing, blockchain technologies, and more to revolutionize the compliance processes. New regulations are being introduced frequently, and at the same time, the fines for non-compliance are also getting more costly.
RegTech solutions are becoming more important to businesses every year as they try to stay ahead of the increasing costs of regulatory compliance. RegTech can be categorized in four broad categories, that include:
- Regulatory monitoring
- Regulatory obligations
- Compliance management
- Compliance execution
A RegTech solution could potentially provide tools that cover all or most of these categories. Other RegTech solutions may only offer you one of these services. Let’s take a closer look at how these solutions work.
This is the most basic type of RegTech, but that doesn’t mean it doesn’t provide a very useful service for businesses. Regulatory monitoring tools provide businesses with the latest regulatory content.
It can be very difficult, even for a dedicated compliance team, to keep up with all of the latest regulations. Regulatory monitoring makes this task far easier. Typically, these tools act like a feed, resource center, or library that can be accessed and reviewed to simplify the process of research and planning.
These RegTech solutions take all of the regulatory compliance information and consolidate them in one location. This includes a number of different documentation, such as laws, rule updates, guidance, and enforcement actions.
Even though this is one of the simpler regulatory technologies, it provides businesses with a very useful service and helpful resource.
The RegTech solutions that fall into this category take regulatory compliance to another level. Having access to the laws, guidance, rule updates, and enforcement actions are only valuable if you know what to do or how to comply.
Regulatory obligation tools scan regulatory documents and return actual actions that can be and should be taken by the business in order to remain compliant. These solutions offer businesses a more convenient way to ensure compliance by taking the guesswork out of the process.
For example, if new FinTech regulations are released, regulatory obligation solutions will tell you what steps, if any, need to be taken in order to ensure compliance. This not only improves efficiency within your organization but also helps reduce the costs of non-compliance.
This RegTech solution is more sophisticated than the other two solutions we have already covered. Compliance management systems not only give your teams actionable compliance information, but they also contain all of the regulatory information for your specific business and industry so you can track and manage your compliance efforts.
These solutions are similar to CRM or other management software solutions, but they focus solely on regulatory compliance. These tools can be particularly useful in organizations with a lot of departments, employees, and governing regulations such as healthcare, financial services, and government work.
These RegTech solutions are the most advanced and use the most HiTech technology, such as AI and Machine Learning. They build on the services offered by the previously mentioned RegTech tools and culminate by giving organizations the ability to execute tasks in a compliant manner.
This includes task automation as well and the ability to assess compliance with controls and obligations.
A Brief History of RegTech
While the term RegTech was not formally used until 2015, the history of RegTech begins back in 2008. In 2008, there was a massive global financial crisis. We are not going to dive into the intricacies of this crisis, but the end result was the passage of the Dodd-Frank Act, which significantly altered the regulatory compliance world for financial institutions in the United States.
Increasing regulations coupled with the disruptive nature of technology advancements led to the rise of RegTech. The earliest adopters of RegTech were financial institutions and FinTech companies, but in less than five years’ time, the RegTech Market grew from a 1 billion to nearly a 9 billion dollar industry.
Despite significant rollbacks to the Dodd-Frank Act in 2018, RegTech solutions continue to gain more traction and popularity as more industries and businesses outside of the financial sector begin to see the value these technologies provide.
Today, RegTech is used by regulators and businesses alike in any industry where regulatory compliance is an active issue that needs to be accounted for. Obviously, a lot of these organizations work in financial services, but healthcare, government, and technology are also sectors that are well represented in RegTech.
The Benefits of RegTech
Now that we have a better understanding of RegTech, let’s explore some of the benefits associated with these technology solutions so you can see for yourself if your organization could benefit from RegTech. Here are the main benefits of adopting RegTech solutions:
- Risk management
- Internal alignment
Accurate reporting is an important part of regulatory compliance. Organizations that rely on manual processes or have operations that are siloed create compliance gaps in their reporting. Compliance gaps can lead to increased reporting errors and open your organization up to more risk.
RegTech solutions are designed to eliminate compliance gaps and reduce the amount of compliance risk your organization is exposed to. Non-compliance costs get more expensive every year. You can’t afford to wait to implement RegTech solutions.
The regulations that an organization must comply with get more numerous and complicated every year. It is very difficult and time-consuming to keep up with all regulatory compliance issues manually.
RegTech solutions can process large amounts of raw data quickly and provide actionable insights giving your organization more time to make adjustments and ensure compliance.
Efficiency is valuable in any industry or organization. Ensure that your teams have the right tools to execute their jobs at a high level.
Perhaps the most valuable aspect of RegTech is that it helps protect your organization from unnecessary risk. There is no reason why your organization should face risk due to non-compliance.
RegTech solutions can also help regulators and businesses alike find instances of money laundering and other financial crimes. Non-compliance can be very costly. It is important to make sure your organization is limiting its risk exposure.
Many organizations have teams and processes that act separately, often without any detailed knowledge of what is occurring elsewhere in the organization. RegTech can help keep your internal teams and processes aligned with one another.
Internal alignment makes you more efficient, increases efficiency, and reduces the amount of risk you could potentially face. Internal alignment also gives your organization clearer insights and helps build and maintain a strong internal culture of compliance.
We are past the early adopter phase of RegTech, but that doesn’t mean that it is too late for your organization to adopt these technologies. Regulatory compliance is always going to be a key consideration for many industries and businesses, but you can set yourself up for success by investing in a RegTech solution.
Modern app development is always innovating and creating new solutions that work better than ever before. It can be confusing to try and navigate the tech industry alone, but if you need help, you can always reach out to an app development partner for valuable insights and expert guidance as you try and choose the right RegTech solution for your organization.