What is RegTech and Why Does It Matter? | Ascent

What is RegTech?

RegTech, short for Regulatory Technology, is the application of emerging technology to improve the way businesses manage regulatory compliance.

Risk and Compliance teams are burdened with an increasingly impossible problem to solve. 

They have to keep their policies and procedures up to date on the latest regulations and requirements, but the regulatory landscape is moving at a superhuman pace. Rule changes have increased 500 percent in the last decade. In fact, a new regulatory update is implemented every 7 minutes.

And on top of that, fines for non-compliance are becoming more frequent and more severe. In 2019 alone, the SEC published 2,754 enforcement actions, including 95 against public companies — the highest number in a decade. And the FCA recently levied its largest personal fine ever.

How can Risk and Compliance teams stay above the rising tide of regulation? By leveraging technology to help solve the challenges of regulatory compliance. 

RegTech companies are now engaging machine learning, natural language processing, blockchain, AI, and other technologies in order to bring the power of digital transformation to the world of regulatory compliance.

But what do these solutions do, and more importantly, how can they help Risk and Compliance teams at financial firms with the complex task of regulatory compliance?

Below, we offer a guide to the young and growing RegTech industry – explaining what it is, how it came to be, and why it matters.

READ ARTICLE: 9 Common RegTech Questions, Answered


A Brief History of RegTech

The dawn of a new regulatory era

The year was 2008 and the financial world was in chaos. Lehman Brothers had imploded, the federal government took over Fannie and Freddie, and money-market funds broke the buck. 

The world was in the throes of the worst financial crisis since the Great Depression.

The federal government needed to reinstill the public’s trust in our financial institutions. That meant ushering in a new era of regulatory oversight.

This new era was epitomized by one single and massive piece of legislation: the Dodd-Frank Financial Reform Act

Dodd-Frank would mark a sea change in the world of regulatory compliance.

Based on President Obama’s proposal for a “sweeping overhaul of the United States financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression,” Dodd-Frank was undeniably expansive and ambitious. But the success of the Act is more debatable. 

To many, Dodd-Frank seemed like a half-measure that mended the proverbial fence only after the horse had escaped the corral. Many financial institutions saw it as over-zealous and set on putting up unnecessary guardrails. And to the public, it seemed disconnected to their desire to see big bank executives pay for the reckless behavior that had led to the Global Financial Crisis.

But, effective or not in its original intent, Dodd-Frank would mark a turning point in the industry: the moment the regulatory pendulum swung back from the under-regulated era before the Global Financial Crisis to the over-regulated era that would follow.

The massive tolls this new regulatory era has brought to bear on financial institutions was and is staggering.

Since 2008, U.S. banks have been fined a crushing $243 billion. The cost of complying with voluminous, complex, and ever-changing regulations across multiple regulators and jurisdictions effectively amounts to an 8% tax on every firm doing business in the financial space.

For smaller RIAs and broker-dealers, the fixed costs of this regulatory burden has acted like a regressive tax, disproportionately eating a larger portion of their bottom line.

And for global banks, the problem has been different but no less intractable. Forced to compete in an increasingly global marketplace, their regulatory responsibilities have increased exponentially to the point that a small army of compliance analysts, consultants, and lawyers is necessary just to keep up.

In fact, at large financial institutions, the cost of managing legal and regulatory risk averages $10,000 per employee. Managing the complex challenges of MRAs and MOUs can even cost major banks upwards of $1 million apiece.

Clearly, for companies of all sizes this path is not sustainable.

READ ARTICLE: A Rapid Fire Review: The Evolution of Personal Liability


Technology opens up a new path

Meanwhile, in a completely different sector, there was another exponential increase happening, mirroring that of the rising tide of regulation: the rise of artificial intelligence.

The 2010s were the decade where AI began to develop extremely rapidly. Deep learning and neural networks made it possible to “teach” a system how to complete a task using a large data set of examples rather than through task-specific programming. 

The distinction, while seemingly insignificant, has wide-ranging implications. The process of writing a program is extremely labor-intensive. With deep learning, programmers can instead feed algorithms data sets to help them learn. This set the stage for the deep learning revolution.

Leveraging natural language processing and machine learning, AI began to beat humans at Jeopardy!, poker, and Go. And the capabilities these technologies provided began to disrupt industry after industry.

It was only a matter of time until companies brought the power of these new technologies to bear on the challenges of regulatory compliance.

The RegTech Revolution

This junction, of course, is the moment RegTech was born.

Initially, the financial services industry met RegTech with a healthy dose of skepticism. The solutions RegTech providers promised were enticing, but the world of regulatory compliance is vast and complex, and its margin of error is non-existent. RegTech companies would need to prove that their solutions worked before financial firms would be willing to bet on them.

That’s where the investors stepped in.

They understood the depth of the opportunity and were willing to invest capital to help turn it into reality. 

A lot of capital, it turns out. And very, very quickly.

Chart of global RegTech investment

According to the RegTech Analyst, in 2015 there were 149 RegTech investment deals across the world, totaling $1.1 billion. Just four years later those numbers had jumped up to 317 deals totaling $8.5 billion.

Those deals have continued to average larger and larger amounts. In 2015, only 3.4% of deals were valued at or over $50 million. By 2019, that percentage had shot up 17.3% of deals.

In other words, the industry began to mature over a mere 5-year period.

This investment and maturation helped push RegTech solutions past pilots and out of the innovation phase, so that they could begin operationalizing benefits in a production environment. This, in turn, helped RegTech providers convince financial institutions that the value they now offered was real and meaningful. 

As Ascent Founder and CEO Brian Clark put it, “RegTech is no longer just for early adopters. We’re starting to see the actual, tangible benefit these technologies can provide.

How RegTech Can Help Financial Services

The list of those tangible benefits seems to grow a little longer every day. The industry is flourishing and constantly finding new ways to improve regulatory compliance as a result.

Here are just a few of the kinds of RegTech offerings that exist today:

  • Data management solutions
  • KYC (Know Your Customer) and AML (Anti-Money Laundering) solutions
  • Tax management solutions
  • Risk management solutions
  • Records management solutions
  • Trade monitoring solutions
  • Reporting solutions
  • Portfolio risk management solutions
  • Quantitative analysis solutions
  • Solutions that help companies manage a specific regulation (like GDPR)
  • Regulatory change management solutions

To financial firms trying to get their head around the RegTech space and understand what it means for them, even this abridged list can seem overwhelming

So to help, we’ve broken out the vast and growing RegTech universe into three buckets:

  • Point Solutions
  • Workflow Management
  • Knowledge Automation

Organizing the RegTech Landscape

Point solutions focus on one particular regulatory compliance problem. For banks, this might mean automating their anti-money laundering efforts. For wealth managers, it might mean streamlining and automating the cumbersome processes of know-your-customer data collection and suitability analysis. And for asset managers, this could mean leveraging robotic process automation (RPA) to turn the laborious, manual production of the hundreds of disclosures they’re required to churn out annually into an automated process.

Workflow management solutions, like GRC platforms, can improve Compliance and Risk teams’ efficiencies by multiples. The right GRC can help Risk and Compliance teams manage their obligations by linking internal controls together in one place and providing visibility into processes and requirements. GRC platforms can also offer instant auditing and reporting tools to track activities in the case of an audit.

Knowledge automation solutions are positioned upstream of both point solutions and workflow management tools, situated right at the very beginning of the compliance process. They offer the ability to leverage machine learning and NLP in the process of analyzing regulatory documents to identify which obligations apply to a business, automating one of the most onerous of compliance processes – regulatory change management. In short, these solutions treat the vast troves of regulatory documents as big data and, by running that data through an AI, turn it into knowledge.

Some change management solutions act more as a news feed, aggregating information that may or may not be relevant. At Ascent, though, we believe technology can take us beyond that, and we’ve leveraged AI to create a visionary regulatory knowledge solution, which automatically delivers up the obligations and rule changes that apply specifically to your business.

LEARN MORE: How Ascent Simplifies Regulatory Change Management with Automation

Regulators give the green light

One of the most exciting recent developments in RegTech is the embracing of the industry by regulators. 

Regulators have started to go on record asking financial firms how they’re leveraging RegTech solutions — and if not, why?

Additionally, regulators are now working together to find and help implement new RegTech solutions. Projects like the Global Financial Innovation Network’s (GFIN) cross-border pilot could create value for the entire market. GFIN, a group of 35 international organizations serving as a network of regulators to knowledge-share and collaborate on implementing RegTech solutions, will help firms operate more efficiently and reduce costs — all while ensuring consumers are better protected. 

The goal of RegTech providers, after all, is to help create a world where financial firms are empowered by the rule of law. Regulators’ embrace of RegTech is a huge step forward in achieving this.

LEARN MORE: What is SupTech and How Will it Change Compliance?

What’s on the RegTech Horizon

The Next Step: End-to-End Compliance

While the variety of RegTech solutions out there might seem daunting at first, especially to financial firms trying to determine which solution is right for them, this diversity is actually to their advantage. 

The breadth of solutions available means financial firms can build a fully integrated technology stack that is unique to and optimal for their specific business.

Marketing and shipping are both examples of industries that, by embracing automation and technology, have built tech stacks that are composed of a variety of solutions rather than relying on a single one-size-fits-all solution. We believe the same mentality will be necessary in order for financial services to achieve what we see as the holy grail of regulatory compliance: End-to-End (E2E) Compliance.

E2E Compliance is a fully traceable process that connects external regulatory events to a business’ specific obligations, then all the way through to that business’ internal controls, policies, and procedures. 

For businesses to pursue E2E Compliance, they must first outline their processes and engage with the market to identify which aspects are possible to automate.

In order for RegTech companies to be able to help businesses in this process, they will need to be able to work in concert with other solutions. For example, knowledge automation solutions will need to be able to plug into workflow management tools. This way, firms that wish to retain their legacy GRC platforms or to select one based on their specific business needs will be able to do so.

LEARN MORE: End-to-End Compliance is Closer Than You Think: How Businesses Can Get a Practical Head Start


Where do we go from here?

RegTech stands at an exciting crossroads. The need for its solutions has been demonstrated all too clearly. And the power of the technologies offered — brought to life by the wellspring of funding pouring into the space — certainly has the ability to meet those needs. 

But the work of RegTech providers is far from over.

The biggest obstacle standing in the path of RegTech is the trust gap that currently exists between providers and financial firms. This trust gap is understandable. The consequences for any technological shortcomings can be catastrophic. And the promises of RegTech solutions can often seem too good to be true.

But there are ways to close this trust gap. Financial firms don’t need to feel stuck between a rock and a hard place when evaluating RegTech providers. With the right vetting process, it’s possible for them to embrace these new solutions with both confidence and excitement.

LEARN MORE: “But Does RegTech Actually Work?” 3 Ways Financial Firms and RegTechs Can Bridge the Trust Gap


Why RegTech Matters

Historically, the world has viewed the tasks of spurring business and protecting consumers as diametrically opposed, at least from a regulatory standpoint. Under-regulation is required to give businesses the freedom necessary to generate real value and profit. But this all too often comes at the expense of the consumer, who needs to be protected — thus leading to over-regulation.

RegTech’s power is in subverting this dichotomy. With RegTech, we are helping to create a world where it’s easier for businesses to comply, unlocking both opportunity and wealth without compromising consumer protection. And that makes a better world, for everyone.

In the world of regulatory compliance, laws are written with computers but followed with post-it notes and excel sheets. This juxtaposition is unsustainable.

Technology can provide a path forward through the increasingly complex maze of regulatory compliance.

Stop drowning in regulation.

Ascent’s RegulationAI™ allows us to automate the most tedious and error-prone parts of compliance. Based on your firm’s unique profile, Ascent automatically delivers the obligations and rule changes that are relevant to your business, cutting out significant white noise so that you can focus on a much narrower set of obligations.

Ascent serves all types of financial services firms, including Banks, Introducing Brokers (IBs), Commodity Pool Operators (CPOs), Commodity Trading Advisors (CTAs), Registered Investment Advisors (RIAs), Broker-Dealers (BDs), Futures Commission Merchants (FCMs), Asset and Wealth Managers, and others.

To learn more about Ascent’s RegTech platform powered by RegulationAI™, contact us directly. To stay at the cutting edge of RegTech and receive updates from Ascent, subscribe to our monthly newsletter Cliff Notes below.

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