In an age where technology is evolving at a breakneck speed, the need for regulations to link with that is becoming ever more important.
In order to keep up with a constantly changing technology sphere, a regulatory environment must be able to accommodate the changes in its midst. Regulatory technology is evolving at a rapid pace, and the need for it to deal with regulatory challenges is being met.
Henry Balani, global head of industry and regulatory affairs for Encompass Corporation, used his time to highlight a number of key ways that technology can – and is – supporting the regulatory process.
He said, “Geopolitical events have increasingly driven the need for RegTech solutions to address compliance requirements. These compliance requirements typically stem from public policy to address money laundering and other global financial crime activities.”
Balani gave the example of the Russian invasion of Ukraine, which has resulted in a significant amount of sanctions placed on corporations, individuals and other entities that have supported the Russian government.
“The unprecedented scope of these sanctions, that have included both financial and trading restrictions on Russian banks have made it challenging for Western banks to identify these entities, place holds or freezing orders on their customer accounts to comply,” said Balani.
Significant global events such as this and the recent conflict between Israel and Palestine have highlighted the need for banks to be more vigilant in identifying transactions supporting terrorist organisations, Balani stated – noting that these events mean a greater reliance on RegTech solutions to comply and avoid penalties and negative public press if such banks have been seen to support the sanctioned entities.
How does Balani believe banks can address these challenges? “To be compliant, banks need to first identify the regulatory requirements and understand their compliance obligations as they apply to their business practices.” Furthermore, policies should be developed based on risk profiles and lines of business – with policies and procedures needing to be regularly reviewed to ensure they stay current – especially as they apply to RegTech applications that are used to meet regulatory compliance requirements.
He added, “Banks typically will already have a technology compliance solution in place and need to continually monitor their effectiveness by conducting audits of their solutions. For example, testing of current customer accounts and transactions includes sampling updated sanctioned entities to ensure they are identified in their RegTech solutions and can be identified as part of their current policies and procedures.”
Balani remarked that RegTech solutions offer a range of solutions that address compliance requirements, including AML requirements; compliance risks including regulatory compliance reporting, operational, strategic, and operational risks. “As the level of complexity grows, we see an increasing number of RegTech solutions offered in the marketplace that banks can leverage,” he said.
The Encompass regulatory affairs head mentioned that this complexity is compounded across multiple jurisdictional customer onboarding and account review as part of an AML process.
He explained, “When a bank onboards a large corporate customer that is global, there is a need to review their structure, which will include divisions across multiple countries. The ownership structure can be complex, especially if divisions are in turn owned by divisions in other countries.
“For example, ABC company, with headquarters in the USA, can have divisions in the UK, and the UK division can have subsidiaries in France and Germany. The German subsidiary can in turn own divisions in Sweden. The key here for AML processes is the identification of beneficial owners of these divisions, which is defined here with more than 25 % ownership of the company shares.
“The process to identify these beneficial owners is to review the company registers of that country to ensure they are not considered sanctioned or high risk. The challenge in accessing different company registers individually means inconsistent data access. RegTech can now address this challenge, where country registers can be merged into data models that can provide consistency and accuracy in the AML process.”
Balani remarked that consistency and accuracy are further enhanced when customer records are maintained digitally in real time.
He stated, “All too often, customer records in a bank are kept in disparate silos where customer information is used specifically for a certain type of transaction. For example, customer records kept for onboarding may be different from customer records used for new or existing business activity.
“A customer looking to set up a bank account may have to provide the same records to a bank division that processes home mortgages, construction loans or even when settling trade transactions. Effectively, customer records need to be digitized and used across multiple bank units, reducing the need to ask the same customer for their documents multiple times.
“A digital profile is an important component of a RegTech solution as it provides an updated base line of the customer’s records in order to provide accuracy and consistency in bank processes. The use of technology to meet regulatory requirements will continue to grow. As previously discussed, banks will need to leverage cloud computing to better manage infrastructure costs and scale their technical operations easily.”
AI is quickly becoming a critical and important component in regulatory compliance requirements, Balani stated. Recent advances in LLMs that offer on-demand GenAI tools are being tested and incorporated into compliance processes, he said.
“Given the friendly, language-intuitive nature of generative AI, these tools are being used to categorize, summarize, and provide actionable directions that a compliance analyst can use to quickly identify suspicious customer transactions that potentially violate regulatory requirements. Using predictive analytics with machine learning algorithms, false positives can quickly be identified within customer accounts and transactions, resulting in overall lower cost of operations and greater efficiency in identifying true matches,” he stated.
Balani professed the industry will continue to see rapid growth of technology across all areas of business processes adopting these technological innovations to improve efficiency and effectiveness.
He said, “RegTech will play a key role here, and banks will need to consider adapting their current engagement approaches and strategies to leverage RegTech. Banks should collaborate with RegTech providers on testing and implementing innovative solutions that meet their specific needs. Banks will also need to be willing to comprehensively test innovative solutions and allocate budget for proof of concepts and other validation approaches prior to production deployment.
“There needs to be greater willingness to work with RegTech providers and recognize them as long-term partners in addressing challenging compliance requirements as opposed to vendors that provide pre-defined solutions for specific issues. The pace of technology change is too rapid to assume solutions have been comprehensively tested and ready to be immediately deployed in commercial environments.”
Balani concluded, “The development of sandboxes is an important area here, and working closely with regulators, these sandboxes allow for safe, interactive, and cost-efficient methods to test innovative technologies before deploying in a commercial environment. We see the use of regulatory sandboxes continue to be adopted globally given the rapid pace of technology innovation.
For example, US and UK regulators have encouraged RegTech firms to use regulatory sandboxes in tech sprints, and other collaborative forums across various consumer and business use cases, to test new innovations prior to commercial release.
Technology to address complex business requirements is here to stay. We have a nexus of rapidly evolving compliance requirements along with new technologies that can be leveraged to address complex regulatory requirements. A change in how the different stakeholders, in this case regulators, banks and RegTech providers, approach these challenges is now critical.
“Banks need to identify their regulatory requirements to assess their current state of compliance and share their current state with RegTech providers to test and adapt their solutions by comprehensively testing these solutions in sandboxes, working with regulators. Once these solutions have been verified, commercial adoption can then follow. With these changes in approaches, we will see the effective adoption of RegTech solutions, helping to address our current complex geo-political challenges.”
Clarity and transparency
In the view of Antoine Moreau, head of infrastructure and managed services at Regnology, the regulatory landscape is ‘constantly evolving’ and is getting increasing complex.
To this end, Regnology believes it is helping to navigate this landscape. He said, “We have been investing in building an AI/ML engine dedicated to the regulatory space. Its purpose is to bring clarity and transparency on what the regulation is about, what our interpretation is and how it was implemented in our solutions.
“Our solution is uniquely positioned to achieve this goal given that we can map all the regulatory documentation to our source code and our own documentation. This significant investment is also enabling us to implement native AI/ML functionalities directly in our products to drive efficiencies for our clients.”
Meanwhile, Anh Chu, product director at Regnology, took a path more focused on the ongoing rise of artificial intelligence.
He remarked, “If you think of all the technology changes that has happened over the years, the move to cloud, big data and data analytics, it has taken us to the natural progression to where we needed to be with AI.
“These are two areas where we are heaving investing. First area is for our clients. We are integrating AI/ML into our solution where it would help our users the most around data for all their regulatory needs. This includes identifying data issues before it even gets processed, helping our clients understand all data requirements and any changes due to regulations, and analytics related to their data.”
Chu added that the company is providing tools that will help such firms figure out how to utilise its solution on their own. The second area the firm is investing is embedding AI into the development process.
He detailed, “AI is allowing us to keep up and make required regulatory changes quicker and therefore ultimately help our customers with a shorten turnaround time to market. Our customers will get changes faster with higher quality delivery than in the past.
“AI is allowing us to provide better documentation, release notes and support to our customers. We only see this improving through time as we add more and more uses into our product and organization.”
Evolving technology
One particular technology that has undergone a rather spectacular evolution over the last few years has been AI and Large Language Models. Vladimir Ershov, head of data science and machine learning at Corlytics’ Clausematch platform, explained this in greater detail.
He said, “Companies are progressively integrating tech solutions using Large Language Models (LLMs) and Generative AI (GenAI) to comply with stringent regulatory demands and adapt to the evolving regulatory landscape, subsequently enhancing the accuracy and efficiency of compliance procedures.
“ML has become a standard tool in addressing contemporary challenges particularly evident in applications like AML and risk assessment. Although the successful implementation of ML for classifications, tagging, and regulatory horizon scanning are scarce, Corlytics stands out as a notable example in this domain.”
Ershov remarked that looking ahead, regulatory mapping and gap analysis are anticipated to be the next milestones achievable within the next one to two years.
He continued, “The Clausematch product is already equipped to handle certain aspects of regulatory mapping, and we are diligently working to augment its capabilities with GenAI. This will enable us to navigate the complexities of the regulatory landscape more efficiently and prepare proactively for future challenges.”
Third-party shift
Maria Scott, CEO of Taina Technology, believes that in recent years the RegTech sector has seen an increasing shift away from internal builds to working with RegTech vendors and adopting RegTech solutions.
She stated, “Financial institutions and financial service companies are choosing to leverage RegTech solutions for a number of reasons. These include the fact financial institutions are under growing cost pressure, and experience shows that building systems typically takes longer and is more costly than organisations’ projects.
“Other reasons include the greater risk associated with internal builds when compared to industry solutions due to the fact latter firms often have more in-depth and current knowledge of evolving regulations. In addition, regulators and tax authorities are becoming more aggressive in enforcement and customers are now increasingly judicious about their experience with financial institutions.”
Scott explained that it has been ‘rewarding’ to witness some of the largest financial institutions sharing positive experiences of investing in young RegTech providers.
“Jointly, they have been able to create perfect solutions for the evolving needs of institutions to meet the changing regulatory landscape resulting in high ROI for both parties. These new developments are shaping a stronger collaborative culture for our industry, and there is a sense that we are travelling together in the same direction.
“Specifically addressing the question – the highest ROI way to leverage technology is to combine experience and knowledge of financial institutions with the agile approach and cutting edge technology of RegTechs. This can be achieved through a genuine partnership approach and in some cases investment of Financial Institutions in RegTechs they use,” Scott professed.
Trust is vital
As more and more companies seek RegTech providers for third-party solutions, one aspect of this which is vitally important is trust – and more specifically, trusting providers.
Christodoulos Mouskos – head of operations at MAPFinTech – stated, “Regulatory requirements are inherently complex and resource-intensive, often necessitating a diverse array of expertise. By collaborating with RegTech providers, firms have access to a pool of specialists that are needed for this purpose, including Regulatory Analysts, IT Business Analysts, Software Developers, Quality Assurance experts, UI/UX experts, Infrastructure architects, and Project Managers. This collective expertise ensures that firms have the necessary skills to navigate evolving regulatory landscapes efficiently.
“Moreover, RegTech solutions offer several other advantages including cost efficiency. For example, they are eliminating the need for substantial in-house investments in technology since these solutions are designed to be scalable, allowing firms to adapt swiftly to changing regulatory demands.
“In addition, these solutions are usually more flexible and agile and thus can be easily fine-tuned to meet the company’s specific compliance requirements. Importantly, the use of RegTech solutions eliminates opportunity costs, as firms can focus on their core business operations instead of diverting resources to regulatory compliance efforts. Ultimately, relying on trusted RegTech providers reduces the risk of non-compliance and ensures firms remain on the right side of the regulations.”
One practical example of organisations leveraging technology to meet regulatory needs, Mouskos stressed, was in the area of regulatory reporting.
He explained, “Regulatory reporting is a critical process for regulated entities such as investment firms, banks, and other types of organizations, as it involves the regular submission of specific data to competent authorities to comply with relevant regulations. This process is inherently complex and demands a deep understanding of both technology and regulation.
“Regulated companies that opt for robust regulatory reporting solutions from reputable service providers stand to gain significant advantages. Firstly, they can benefit from lower reporting fees and reduced technology costs thanks to economies of scale offered by these providers. Secondly, these companies can leverage the extensive industry experience of the service provider, who has exposure to a diverse client base. This means they can tap into best practices and industry knowledge that might be challenging to obtain in-house.”
Mouskos also mentioned that moreover, faster integrations and onboarding times are achievable through these solutions, enabling firms to quickly adapt to changing regulatory reporting requirements and minimise disruptions to their operations.
“In essence, regulatory reporting technology solutions help regulated entities navigate the complex regulatory landscape efficiently and cost-effectively,” he said.
Mouskos concluded by stating that in order to further increase efficiencies, companies should foster high levels of collaboration with their service providers. “Beyond merely treating service providers as vendors, organizations should view them as extensions of their own operations. This mindset shift is crucial for unlocking the most value from these partnerships,” he explained.
Further measures to enhance efficiencies, he said, included leveraging data analytics and machine learning tools, implementing standardized data exchange formats, investing in ongoing training and education to stay up to date with the latest regulatory changes and technological advancements, and finally establishing clear performance metrics and key performance indicators (KPIs) for technology solutions and compliance processes.
Successful systems
Darragh Hayes, CEO of RegTech firm LEI Worldwide, providing his company’s technology a successful use case of leveraging tech solutions to meet regulatory requirements in today’s regulatory landscape.
He stated, “Having an LEI code is essential for regulated and financial services firms who fall under the scope of 250+ regulations globally requiring its use (such as MiFID 2, EMIR, Dodd-Frank Act etc), making the LEI possibly the most financially regulated compliance instrument ever. New LEI mandates are being introduced constantly, with the RBI in India, CHAPS payment messages in the UK and now countries are all looking towards the LEI to bring market transparency for regulators.
“Previously, large organizations with a global footprint and vast quantities of entities under their remit would manage an LEI portfolio using a spreadsheet and ad hoc last minute reminders.
“Today, the technology needed to bring this all under control exists, and LEI technologies such as LEI Worldwides RAMP 2.0, is a good example of how firms have not only used technology to meet regulatory LEI requirements, but turn what was once a paperwork laden burden, into an automated, recurring revenue generating asset.”
Hayes gave context, stating compliance with LEI regulations is vital for accurate identification and transparent reporting of legal entities involved in financial transactions.
How could firms effectively utilise technology to meet LEI-related needs? He explained that companies can deploy a good management system specialized for LEI management. These tools can automate the LEI registration process and ensure ongoing compliance with updates and renewals.
Hayes stated, “They can also validate LEIs in real-time during transactions. Some key features to watch out for include multi-user access, API driven registrations, good management team, appropriate software systems, automated renewal reminders, account managers and responsive customer service. The right LEI Management system, can help you consolidate your LEI portfolio and bring all your LEIs under the one roof. “
By utilising a suite of redistribution technologies that now exist, firms can whitelabel an LEI offering to their clients, Hayes added,
“To bring context to the opportunity, corporate services providers, asset managers and fund management companies may have thousands of entities within their scope, and tens of thousands within their wider ecosystem, which are made up of funds, investment vehicles, SPVs, and various structures all of which need LEIs.
“Traditionally, organisations would tell their clients to obtain their own LEIs, now that more and more companies are seeing the LEI opportunity this is a service being brought in house with the use of whitelabel offerings built using API, iFrames and cloud based systems from reputable LEI service and software providers such as LEI Worldwide.”
Companies can also integrate the LEI into their financial systems and transaction processing platforms.
Hayes stated, “This enables automatic validation of counterparties’ LEIs, ensuring compliance with regulatory requirements such as MiFID II, but can also ease the customer onboarding process and automate outdated KYC & AML processes.
“However, firms should stay vigilant about evolving LEI-related regulations and adapt their technology solutions accordingly.”
Hayes summarised, “The LEI has been in existence since post 2010, but it was heavily mandated until 2018, however the legacy systems were never updated. After 2018, over 1.5 million LEIs came into existence and thus the need to adapt became apparent.
“Cases of fines, penalties and even stock exchange de-listings caught the headlines for LEI related compliance issues. By leveraging more modern technologies firms can alleviate this regulatory requirement and even turn it into an asset.
“The future will likely see increased integration of AI and machine learning, enhanced data accessibility, and continued collaboration to ensure the GLEIS (Global LEI System) is being utilised globally to its full potential.”
Digitisation and sophistication
There are a number of businesses who have been helping to drive the digitisation process. Some of these include Arctic Intelligence, an Australian RegTech firm.
Anthony Quinn, founder of Arctic Intelligence, said, “We’ve helped hundreds of clients across the financial services, gaming, gatekeeper professions and professional services to improve their approaches to undertaking financial crime risk assessments through our multi-award-winning platforms, AML Accelerate and the Risk Assessment Platform.
“In practical terms we help digitise financial crime risk assessment process often conducted manually using spreadsheets and then provide an auditable workflow, options to configure methodology and content, manage and track issues, upload evidence and build dashboards and reports significantly improving both quality, efficiency and effectiveness”.
Matthew Ranson – co-founder and partner at Novatus Global – meanwhile, added, “We anticipate that as technology advances RegTech firms will become increasingly sophisticated. Use of AI and machine learning will become standard – we are already developing this into our products. Increased use of AI will allow for automation, horizon scanning etc. which will naturally create efficiencies.”
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