More than nine months into the coronavirus pandemic, different segments of the RegTech industry has been responding to the crisis in various ways.
Officials in the Chinese city of Wuhan first reported a cluster of suspected pneumonia cases on New Year’s Eve 2019. The disease was later identified as a strain of the coronavirus. Since then, the contagion has spread across the world, resulted in lawmakers introducing social-distancing rules and caused over 38 million confirmed cases. Covid-19 has also caused over one million deaths, according to John Hopkins.
The countrywide shutdowns has unsurprisingly also affected the RegTech industry. “The Covid-19 pandemic marks a pivotal moment in the RegTech industry and one where the sector is uniquely placed to prove its worth,” says John Lee, president at CSS RegTech.
“From its infancy, RegTech has been designed to replace manually intensive practices through automation and to reduce the burden of regulation and with it the risk of regulatory fines.”
Lee argues that even though regulations have basically remained the same throught the crisis, albeit with regulators demonstrating some more flexibility and leniency, the way financial services and other industries operate have changed fundamentally over the past nine months. Remote working has increased the need for off-site and automated compliance solutions.
And to Lee this represents an opportunity for more established businesses. “Against this backdrop, established RegTech firms stand to deepen their relationship with customers, based upon the resilience of their business model and ability to operate effectively in what will become the ‘new normal’ of remotely serving clients,” he says. “Demand for managed services in support of regulatory software is only going to increase in this environment.”
The pandemic has also wreaked havoc on investment into the industry. The RegTech sector has seen investment plummet over the last two quarters as investors have become less willing to spend their money during the financially troubling times. Between July and September, RegTech deals around the world enjoyed cash injections worth $13.9m in total, a significant drop compared to the $30.4m invested in the third quarter 2019, according to FinTech Global’s research.
However, Lee is confident that this is not necessarily bad for more established companies. “Crises are characterised by a flight to quality,” he says. “This is no different in the RegTech sector. In contrast to the opportunities the new operating environment presents to larger, more established RegTech firms, small startups confront a famine of funding with a decline in venture capital to support first and second-stage funding rounds.
“Meanwhile, larger businesses, particularly those with private equity backing, will continue to grow and expand through a combination of acquisition and organic investment in their core platform. With credit markets open for business and PE firms sitting on the same high levels of cash that characterised the sector pre-Covid, funds will flow toward the larger RegTech firms.
“This is a sector characterised by the breadth of its multi-jurisdictional coverage and depth of its solution suite. As smaller RegTech entities succumb to a lack of immediate cash or the ‘best of breed’ are consumed through acquisition, the RegTech sector will witness further consolidation as a result of Covid. This will mirror the trend in the financial services sector toward a consolidation of vendor relationships, where the emphasis will be on partnering with resilient RegTech providers who have proved their worth during the pandemic.”
The new normal has meant that employers have had to get used to having a remote staff. This has meant that workers have become accustomed to using a smattering of communication tools like Zoom, Microsoft Teams and Cisco Webez.
But with using those tools, the risk of falling foul of compliance obligations has skyrocketed too. For the RegTech ventures specialising in communication, this has presented them with significant opportunities.
“The coronavirus has had a meaningful impact on the RegTech space for communications compliance and supervision,” says Marc Gilman, general counsel and vice president of compliance at Theta Lake, the RegTech company. “In particular, the rapid adoption of collaboration tools by financial services firms means that the related oversight of those platforms for regulatory, privacy, and cybersecurity risks has become a critical concern.”
Moreover, even though using these tools have proven essential during the pandemic, they have also created more factors for compliance teams to worry about. “Firms must monitor what was spoken, shown, or said in collaboration conversations for a variety of compliance and risk purposes: determining if wealth managers are consistently providing Form CRS as part of Regulation Best Interest obligations; confirming that approved advertising materials are being properly displayed and archived; and ensuring that employees abide by restrictions on the disclosure of MNPI, account details, and other PII,” Gilman says.
“Cybersecurity risks related to malware and other inappropriate content are escalating and firms must leverage technology to mitigate them. Again, having transparency into conversations on collaboration platforms and the ability to identify malware and other problematic URLs, abusive behaviour, and inappropriate images and logos is essential. Rudimentary approaches to compliance and supervision focused on searching keywords on email or chat will miss dynamic collaboration content displayed through screen shares, whiteboards and web cams.
“Finally, managing collaboration platform security is a challenge. Validating that enterprise security settings for meeting passwords, encryption, and waiting rooms are configured and remain active is crucial. Leveraging integrated tools that use AI to analyse the content of collaboration data and facilitate security management ensures that an efficient and consistent application of controls is maintained.”
Going online has also created a higher risk of financial services firms suffering from fraud. “That is why companies must make an extra effort within their RegTech needs,” says a spokesperson from Electronic IDentification.
For businesses that previously predominantly operated in the offline world has found themselves forced to set up new anti-money laundering and security controls to limit their exposure.
“Electronic IDentification (eID), for example, is offering totally free up to 50,000 identifications for businesses, governments, and users in order to keep society running despite Covid-19,” the spokesperson continues. “Thanks to RegTech solutions such as VideoID, users, companies from all sectors and public administrations can operate online with assurance.”
But the opportunities has also resulted in some challenges, with clients requiring more support than before. “Implementing RegTech solutions in order to operate online in a complex and difficult environment is allowing businesses to grow despite social-distancing and coronavirus,” the spokesperson adds. “User behaviour has drastically changed not just during the pandemic situation, it will redefine the way society performs activities forever. Adapting customer experience during coronavirus and adopting a RegTech approach is not only a legal obligation but a way to ensure growth and business sustainability.”
For Dublin-headquartered RegTech company Think Evolve Solve’s founder and CEO Thomas Russell, the coronavirus have demonstrated a need for actionable data.
“The pandemic has had a devastating effect on individuals, communities and businesses across the globe, but its impact has ignited our collective social conscience and desire for environmentally friendly, sustainable options, as consumers, employees, stakeholders and investors,” he says. “Whilst the term ESG has been around for the last decade, it is only in the last few months that it has become part of our common vocabulary.
“We have all witnessed the heightened interest in ESG and with it demand for high quality ESG data for informed decision-making, ratings and now increasingly for regulatory reporting with the EU Taxonomy, and changes to MiFID2 regulations.
“As an ESG data specialist, supporting businesses, asset managers and administrators, we are experiencing a high level of demand for our Gather 360 data tool to enable the cost-efficient collection, validation and formatting of ESG data”
Copyright © 2018 RegTech Analyst
