Some of the larger players in the industry are still struggling to adopt RegTech, however, having a centralised system in place and focusing on the data are both key to unlocking its potential according to Ted Datta, Director – Governance, Risk and Compliance Solutions at Bureau van Dijk.
RegTech solutions have emerged from the FinTech space over the last couple of years, offering to put an end to financial institutions’ compliance woes. The technology has gained support from regulators and investors alike, however, many of the companies have failed to scale as planned, and adoption in the financial industry is yet to match the initial hype.
According to a recent report from RegTech Analyst, the global RegTech industry is showing no signs of cooling down, with the sector raising more than $2.5bn in investment already this year. To put this in perspective, RegTech companies have raised almost 2.5-times as much capital this year than they did in 2017.
The sector expanded steadily between 2014 and 2017, with funding increasing at a CAGR of 12.4% and annual deal activity staying above 100 transactions during the period.
However, 2018 has been a standout year for RegTech investment, with funding reaching record levels. More than $2.5bn has been raised in the first six months of the year already, which is equal to 87.2% of the total capital raised by RegTech companies in 2015, 2016 and 2017 combined.
Despite a rise in investment in the last few months, the question is are firms ready for RegTech in this space according to Datta.
In an exclusive interview with RegTech Analyst, Datta said: “Having a CRM is the key to this for many people. It might not be RegTech per say, but having a joined-up platform for client management is vital in today’s market.”
With everyone focusing on innovation on technology and the potential benefits it brings, Bureau van Dijk is focused on the data.
“It’s all good buying the best technology in the market, but if you haven’t got the right data going in, it’s irrelevant,” Datta said.
“The first thing people need to do is improve the quality of their internal data. Otherwise you put in place expensive systems to manage the process, but the quality of information is inaccurate.
“For example, you are inputting a customer’s details, but their name is inaccurate, or you are not the person who owns the data, so you can’t see the data behind it. This all makes for inaccurate data entry. That process has to be done before they even start to look at RegTech.”
RegTech brings with it solutions for compliance management, reporting, onboarding verification, transaction monitoring, risk management, capital planning/stress testing, and for ID verification, among others. A number of solutions also help ease the regulatory burden of complying with a number of different legislations, such as PSD2, MiFID II, AML4, and GDPR. However, the financial services industry is yet to fully reap the benefits.
Part of the problem lies in scaling according to Datta, with firms facing fight between outsourcing to shed services versus automation of processes and AI.
While big firms are recognising that in the short term they have a problem, which they have left for a year and a half, the issue is they are bringing in bodies and setting up onboarding teams in low cost locations to ‘bridge that gap’.
“It is hard to scale up straight away and then straight away put in technology like automation. Instead, some people are defaulting because they are under pressure. They are concentrating on building out teams, putting bums on seats and still have huge teams gathering information and resolve hits manually.”
“However, at the same time, they need to be thinking about building a system and how they can leverage machine learning in things like their screening processes etc. To centralise you need to start with the people and then move on to the processes.”
The industry has almost become industrialised, a white-collar factory of people working. Because of this, Datta admits reversing this is a problem because of employment. “You have certain cultures and banks have large desks of thousands of people analysing and gathering information. The questions is where do you put them,” he added.
The 4th AML directive has also highlighted where people are almost ‘too big and not agile enough’ to adapt because a lot of the directive is concentrated on the processes.
“Like any regulation, we had a lot of earlier adopts in the first wave. Now we are seeing the laggards trying to do it. It’s been a year, they know they have to do it, they have been audited, their peers have been audited, but every industry has had a different approach to the audit cycle.”
He uses the example of real estate firms, which ironically ‘got quite lucky’. When the legislation came in they got hit very hard, with questions arising in regards to money laundering.
“They had issues, but they didn’t have much legacy technology in place. As a result they can take things out of the box and were quick to adapt. However, other industries like lawyers and accountants, were not in this position.”
AML 4, which was about a year ago, was focused on having customer due-diligence polices which were risked-based, monitoring in place, senior management oversight for high risk clients, and they had to define their approach to PEPs. There was also focus on the ownership, meaning clients had to embed UBO checks into their due diligence process.
“Most clients didn’t have a proper process for it and were relying on manual research,” according to Datta. “The focus on beneficial ownership as part of that check, which people hadn’t had in their standard due diligence check, has been the main driver post AML4. People are having to start proper verification and are starting again in many of their processes. Now we have a lot of people who have left it quite late and certain sectors have been historically slower than others.”
He sees professional services, such as law firms and accountants, as the ‘weak link ‘. A lot of these businesses are still manual and miles away from capitalizing on technology.
“We know of massive firms which still have partner-driven processes that are very manual, slow and they haven’t even got a centralised approach to compliance,” he added.
“To make an efficient process you need to have some central function dedicated to customer onboarding, for example. Otherwise you can’t manage or report on what’s happening. If it’s done in silos or pockets it’s very difficult to do that, plus it’s still based on individuals.”
Adopting this centralised process is something a lot of the big firms are struggling with, with a lot still ‘miles away’ and not even having a team in place, according to Datta.
“Having a unified CRM with up to date data is so important. From that CRM you can attach various different RegTech applications like automated sanction screenings, onboarding etc. However, those bigger firms still haven’t even got those central systems in place.”
Some industries, such as law firms, will have some mandatory systems set up, like billing systems. They try and customise those on top of onboarding and it doesn’t always work.
“It is same with the big firms, they have built their own over time, but we are still seeing that process unfold. The smaller firms are nimbler and have less risk, so the bigger firms and some mid-sized banks are now realising they have to do something.
“The problem is they are too big and have multiple instances of the same type of thing in different lines of their business. That’s the real problem, trying to harmonise the single customer view across different repositories they have bought over the years. There isn’t a real answer to that. In the short term, they may have to roll out a new process, it not just simply bolting on new technology.”
Copyright © 2018 RegTech Analyst
Copyright © 2018 RegTech Analyst
