« RegTech will be 2018 priority”, “RegTech is the solution”, “We should have a team dedicated to RegTech”…
Here are the statements we have been hearing on and on in the financial industry. Buzzword? Reality? What are the main unbiased highlights on this industry as of January 2018?
Thanks to our extensive research of over 230 RegTech solutions coupled with our project experience, Headlink Partners aims in this article to provide financial institutions with our preliminary assessment on the RegTech landscape.
What is a RegTech and what it is used for?
RegTech (portmanteau of “Regulatory” and “Technology”) is derived from Fintech principles. It is a technology that addresses regulatory challenges and facilitates the delivery of compliance requirements.
RegTechs are currently disrupting four main domains:
- Compliance checks automation (e.g. ClauseMatch, Qumram, Droit, Regbot, MetricStream): very heterogeneous solutions are developed; some tackling processes automation, others documentation optimisation; some using AI, others machine learning, others big data… It is hard here to find two companies strictly on the same segment.
- Transaction monitoring and real-time risk monitoring (e.g. Message Automation, Ancoa, ComplySci): many start-ups in the early stage bringing innovative ideas, some of them making interesting bridge between compliance, risk management and trading analytics.
- Identity management: these solutions aims at finding, sharing, analysing and restituting large amount of data to perform the compliance checks like due diligence, KYC, AML, etc. (e.g. Fenergo, ComplyAdvantage, Ayasdi, NetGuardians, Duedil) – this segment is one of the most mature, and Regtechs are able to not only target Financial Institutions but also Defense, Healthcare, etc.
- Regulatory reporting and client documentation (e.g. Abide, Commcise): these aspects have exploded in the past 10 years in direct application of the multiple regulations aiming at « increasing the transparency both towards clients and regulators ».
Why is there a RegTech market?
Four main factors provide the emerging RegTech sector with a promising future:
- Heightened regulatory scrutiny: banks have paid more that € 250Bn in fines since the beginning of 2008 financial crisis; specifically because they were neither able to monitor a great amount of data nor in a position to set up a proper compliance framework to ensure the respect of regulations (US Financial Sanctions, Libor manipulation, Regulatory reporting deficiencies, etc.).
- Regulations have become too complex: for instance, MiFID2 is amounting more than 7000 pages of regulations and all rules are not even known; therefore regulation has become interpretative, and a source of misunderstanding.
- Client journey needs to be seamless: the banking industry is well aware that digitization is a mandatory achievement that implies the use of technology for compliance purposes as well.
- Compliance functions are overstretched: banks struggle to make compliance attractive to drain the competent staff, and are not managing to reach compliance critical size.
Similarly to Risk functions in the 2000s, Compliance functions are at the verge of dramatic change, switching from a policy-oriented function to a more operational role, able to give guidance on concrete and actionable topics. This revolution will tend to seamlessly include compliance checks within the STP processes of financial institutions.
What is the state of the industry?
Headlink Research has mapped 230+ RegTechs: 25% from the UK, 20% from the US, other leading countries being Luxembourg, Ireland, Switzerland and Israel. Most of them are currently in the building phase, the most mature being on the Identity Management & Control and Regulatory reporting segments; the most promising aiming at automating the compliance processes.
However, as always in the emerging markets: RegTechs sprang up like mushrooms in a field during 2016-2017 and we foresee 2018-2019 as a period of market consolidation which may occur rapidly due to:
- long sales cycles and procurement obstacles remaining a challenge, especially as legal and compliance teams are often relatively unfamiliar with RegTech
- traditional technology providers who do not want to be left behind are already showing their interest in the acquisition strategy.
What are the main three outcomes adopters should expect?
How should financial institutions embrace Regtech?
Two main paths, potentially combinable, may be followed in order not to be left by the wayside:
- The USER path: first question to ask is “what is RegTech-isable” within my current organization? Then, what is the sourcing option I should consider? Two options:
- Classic tool selection: as-is diagnostic, to-be ideal process, external actors benchmarking, request for proposal and selection. This option is by far the most commonly chosen by banking actors.
- A worth-studying alternative to cope with the DATA and CUSTOMISATION limits from external provider: the development of an internal solution based on the “good” ideas from the vendors. This option is being considered by some big banks.
- The INVESTOR/INCUBATOR path…
- Goldman Sachs invested in AcadiaSoft, DROIT, Digital Reasoning, MetricStream
- Barclays in Cloud9, AcadiaSoft / Barclays Accelerator in Helm, Alloy, ClauseMatch, Chanalysis
- HSBC in Kyriba, Quantexa
- Santander in Elliptic, Socure, Cambridge Blockchain
… And if the future of a bank was to be competing with giant tech?
What are the red flags to consider before embracing the RegTech journey?
Banks should not consider RegTech as a magic wand. These are powerful solutions in the medium term to obtain high compliance standards at reasonable costs. However the entry ticket is far from being negligible. Here below the major attention points to be kept in mind while opting for a RegTech solution:
How can Headlink Partners help financial institutions in their projects?
To conclude this first of a series…
Embarking on the Regtech journey is not as simple as one usually thinks:
YES, there is gold in it, but it will require more digging to find the « true » pit in this mushrooms field.
And NO, a regtech strategy will not be delivered in a snap…