The aftermath of the 2008 financial crisis brought about an increase in regulation in the financial sector. Since then, legal departments have been struggling with a multitude of regulations to comply with regulatory requirements.
How to master the regulatory flood
Examples include increased reporting and compliance obligations implemented pursuant to the Dodd-Frank Act in the US and within the EU the Markets in Financial Instruments Directive (MiFID II). Thanks to technological advances in the use of Cloud Computing, Application Programming Interfaces (APIs), Big Data and Artificial Intelligence (AI), more and more RegTech and SupTech solutions promise to master this regulatory flood.
RegTechs, short for Regulatory Technology, develop solutions for banks and financial institutions to help them cope with the increasing burden of regulating their business. In turn, SupTech (Supervisory Technology) is primarily used by supervisory authorities to improve surveillance and to reduce the compliance requirements imposed on financial institutions. Software-supported solutions help to record compliance and legal regulations by automating work processes. In particular, routine checks can be carried out faster and more efficiently.
Increasing compliance efficiency
Using tools such as Predictive Analytics, RegTech combines the complex information a financial institute or bank has with data from previous regulatory failures to predict potential risk areas that the institute should focus on. With Regulatory Technology, financial market participants increase efficiency of compliance, reduce its cost and minimize risks. As the financial services sector becomes increasingly digitalized and data-driven the advantages of technology-driven compliance monitoring compared with less automated alternatives have become more and more evident.
Recently, the European Securities and Markets Authority (ESMA) has carried out an analysis of the regulatory and supervisory technologies. ESMA finds that on the demand side, regulatory pressure and budget limitations are pushing the market towards an increased use of automated software to replace human decision-making activities. This trend is reinforced by supply drivers such as increasing computing capacity and improved data architecture.
Hence, fund providers, asset managers and supervisory authorities alike can benefit from RegTech and SupTech applications. This is particularly true in cross-border fund distribution, where regulatory requirements have to be met on country level.
With these new technologies come challenges and risks, notably operational risk. However, with appropriate implementation and safeguards, RegTech and SupTech may help improve a financial institution’s ability to meet regulatory demands in a cost-efficient manner and help regulators to analyze increasingly large and complex datasets.