While the pandemic has driven many economic shocks around the world, regtech has thrived and has seen the appetite for the solutions’ growth, job creation, and experience significant new capital flowing into the sector. There has also been a shift in Government thinking around RegTech as it expands its remit beyond traditional financial services into other regulated industries.
Founded in Australia, the third-largest RegTech hub in the world, The RegTech Association (RTA) has a growing global remit and presence with 150 member organisations. From discussions with our members, going into 2022, we think the following themes will be continuing throughout the year:
1. The top risk areas addressed by RegTech in financial services will be Conduct Risk and AML/CTF and Sanctions Risk;
2. Institutions will show a strong preference for buying rather than building solutions;
3. There will be a growing demand for the best in breed RegTech vendors to address each category of risk;
4. Increasing trust between supply and demand sides of the market, shortening of the sales cycle, and reduction in the time to value;
5. The pitch to win ratio from founders to institutions will be increasing;
6. More institutional (including corporate VC) and professional capital flowing in;
7. New demand from non-traditional sectors of RegTech (Energy, Telco);
8. The RegTech family will expand to include workforce management solutions and other new applications.
All in all, favourable investment conditions, growing recognition of new market segments as customers for RegTech, shortening of the sales cycles, increased education, and development of a common language by established RegTech taxonomies (like RTA’s), and access to a directory of vendors will be all assisting and enabling speedier commercial outcomes.
RegTech is often ‘born global’ and with good reason. Regulated entities operate in a global context and although regulation may vary by jurisdiction, global best practices tend to align, particularly among Tier 1 financial institutions. In the world of financial crime compliance (FCC) where the Financial Action Task Force plays an overarching role, this is very much the case. Some key areas for focus in Asia, also playing out globally in 2022 include:
Customer experience/compliance ‘trade-off’ remains a challenge. FIs need cross-functional approaches to implementing technology so their risk-based approach and resulting policies prove effective while leveraging tech to optimise customer experiences.
The sanctions landscape is shifting – existing sanctions on China and the evolving situation between Russia and Ukraine require FIs operating globally to be prepared with risk assessments and their risk operations to adjust and respond with agility as new requirements become clear.
Perpetual KYC (pKYC)/event-based KYC is an evolving picture with varying levels of maturity across financial institutions across the globe and even within FIs across divisions. The retail/consumer challenges with ID+V are varied and different from the complex world of corporate KYC which demands a more sophisticated architecture and integrated internal and external systems.
Tech-first approaches dominate strategy – unsustainable, ongoing investment in processes that depend on people are being re-examined in favour of ‘tech-first’ strategies. Today’s investments in infrastructure reduce tomorrow’s customer friction while eliminating inhibitors to cost and scale. FIs are using digital transformation initiatives as an opportunity to review old ways and simultaneously uplift compliance.
Crypto and MSBs continue to be in the spotlight. This means that customer due diligence on those parties transacting via these platforms requires further investigation given the increased risk profile when dealing with non-fiat-based digital currencies. As crypto is not a central bank-issued currency, the value of crypto has increased exponentially and as the popularity of crypto grows as an investment class, governments and regulators are increasingly concerned over the potential impact on monetary policy and risk of money laundering when using crypto.
Convergence of traditional data teams, MDM, and FinCrime objectives - ‘Having the data is not enough’ – ensuring it’s the right data, it’s current, it’s independent, and that it can be fully leveraged across multiple systems and processes remains a challenge.
ESG is a major theme – The financial services industry is seeing increasing public discourse around climate change, environment, social and governance (ESG), diversity, and inclusion (D&I), and corporate social responsibility (CSR). Governments and regulators are taking note and even proposing guidelines as well as regulations to address the various green initiatives. Investors and the public are increasingly demanding that companies identify climate-related risks in their financial results. ESG non-compliance will result in penalties on financial institutions that violate these new regulations, therefore requiring policies and processes to be in place, such as additional workflow processes and data sources among other measures.
Regulators continue to convene and engage FIs, fintech, and RegTech communities and facilitate conversation and innovation. For example, MAS’ Sandbox Plus is a recent enhancement enabling ongoing regulator and industry collaboration to raise awareness and understanding of how RegTech and fintech solutions can be utilised. Another example is The City of London Corporation/RegTech Associates report issued April 2021 and the Kalifa Review of UK Fintech issued Feb 2021 that are both calling for more active involvement by regulators within the RegTech community, including actions to strengthen FI and RegTech partnerships. Innovate Finance has taken the initiative to convene a dialogue with their RegTech members to address the priorities raised in these reports, along with improving outreach to UK-based regulators. In the USA, federal regulators, through their innovation teams, have also established outreach programmes to better understand the latest technology trends that impact regulatory compliance issues.
Overall, we predict significant growth during 2022 as Tier 1 and Tier 2 financial services firms are turning their digital transformation efforts to RegTech to bring productivity and efficiency, helping their teams surface risks earlier and use these tools to make better business decisions while protecting consumers. Furthermore, we would expect that RegTech will be reasonably high on the agenda for Governments and regulators as they seek to reduce red tape, get faster access to transparent data, and safeguard the stability of their economies.
This editorial was first published in our Financial Crime and Fraud Report 2022, which showcases the innovation and development of the best practices and instruments used by financial institutions in their fraud prevention activities, to improve the digital onboarding process of their customers while fighting against financial crime.
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