RegTech is short for regulatory technology. It indicates using the technology for regulatory compliance. There is a certain buzz around the term and it is especially used with FinTech. First thing to mention is that RegTech is not limited to the financial industry. However, the rise of RegTech is inextricably intertwined with the 2008 Financial Crisis and the financial sector is currently the pioneer of the RegTech.
Regulatory compliance is the notion of being compliant to the rules put in place by governments or regulatory authorities. The methods of compliance and the problems associated with the process vary from one sector to other. However, in essence, compliance means filling and checking forms on continuous basis. In order to monitor the compliance and enforce rules, regulatory authorities need information from the actors. Under a strict regulation, a huge amount of transaction must be reported by the participants, e.g. banks and other financial institutions, then this information must be examined by the regulatory authorities.
There are two main risks associated with such a scenario. Market actors may not be able to provide all necessary information in timely manner due to overflow of information and, additionally, regulators might not be able to examine all the information provided by multiple actors. Last year Merrill Lynch was fined $45 Million by the UK Financial Conduct Authority over failing to report approximately 72 Million derivative transactions between February 2014-February 2016. This is basically what RegTech aims to prevent.
The Irony of RegTech
Tech world traditionally does not like regulation and it is understandable since the regulation mostly tries to restrict what could be done whereas tech world is more inclined to rigorously push their limits.
How does RegTech help compliance?
There are different stages where RegTech can improve regulatory compliance. I will briefly mention only three areas which are very broad and, to some extent, intertwined. You can increase the examples by examining different regulatory problems and easily come up with a RegTech solution that could be helpful for that specific…