No individual RegTech has the complete answer to achieving compliance, there needs to be an ecosystem which brings different providers together, according to EY partner Mike Zehetmayr.
Over the past 18 months, RegTech has emerged out of the FinTech space with advanced solutions to cope with the constantly rising compliance demands within the financial industry. The possibilities of RegTech seem to be endless, with solutions promising to provide answers to a host of challenges arising from legislations.
According to research from RegTech Analyst, the RegTech sector has 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.
Interest in the sector is showing no signs of slowing down either, with 2018 set to hit record levels. More than $2.5bn was 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.
However, despite a clear rise in interest for the sector, no individual RegTech has the complete answer to regulatory compliance according to Zehetmayr.
“It is impossible for one solution to provide that. The market, as its evolving, is largely issue led. It’s either issued by RegTechs applying its technology to challenges in the regulatory space or it’s someone trying to solve a particular regulatory challenge.
“There is a need for the ecosystem to come together and bring in a number of providers to solve a broader set of challenges and problems which are being presented by regulations in the market,” he added.
In terms of collaboration, Zehetmayr highlighted the efforts made by the FCA and the Bank of England. In November 2017, the FCA and the Bank of England, held a two-week TechSprint to examine how technology can make the current system of regulatory reporting more accurate, efficient and consistent.
“The UK is at the forefront of this and we need to be actively encouraging that. You can see through the work that the Bank of England, the FCA and HMRC are doing in stimulating the market and encouraging firms to meet those regulatory needs. They are also challenging the regulated firms to be open and aware of how they can use technogoly and data to meet those requirements.”
Earlier this year, the FCA said it is looking for views on how technology can make it easier for firms to meet their regulatory reporting requirements. The body also asked for views on the merits of creating a global FinTech sandbox. Its sandbox currently only allows firms to conduct tests in the UK, but this could be about to change as “many aspects of financial markets and FinTech are global.”
Despite the FCA leading the way, there are calls for regulators around the world to do more to foster collaboration and accelerate their adoption.
The regulators are at different points of understanding and engagement with the RegTech market according to Zehetmayr. However, he stresses the importance of them encouraging the broader market to think about how technology and data can put them in better control of their businesses.
“It’s an international market. The fact that the FCA have agreed with other regulators to do an international Tech Sprint is a great step forward.” However, the regulators need to use data and technology as part of their functioning in order for the market to flourish according to Zehetmayr.
EY has set out to foster more collaboration in the market, working with RegTechs to help them engage with, not only other RegTechs, but potential buyers as well.
“RegTech is not just going to become technology which enables control or compliance, it is going to become critical to help firms be confident in the way they socialite the right customers, in the right jurisdictions and in the right way. It will become a vital part of their day-to-day business,” he added.
In recognition of its benefits, a number of banks are leading the way with RegTech partnerships. Over the past few years HSBC has reached agreements with Jumio and Covi Anlytics, UBS counts RegTek, Pole Star and QUMRAM as its partners, while Barclays has bought in alyne, ClauseMatch and Fixnix to improve its processes.
“At EY, we help them work together because the challenge for startups lies in engaging with regulated firms, who are often very well established,” Zehetmayr added. “There is often struggle to marry different cultures and different time horizons, so we help organisations, like RegTechs and FinTechs get through that journey. The people who are engaged in talking to or setting up pilots with RegTechs, are also not familiar with technology and the use of data.”
For example, challenger banks are making use of the technology and data which the RegTechs are providing, as they are in a ‘better position’ to work with startups according to Zehetmayr.
“We are seeing the same challenges as we saw in the FinTech space when that took off. You have got lots of firms and individuals, that have fantastic skills and insights, and are tackling a particular challenge that the market is facing.
“The challenge is not that they are not recognising that RegTech is the right thing to do, the challenge is how high up the priority list does this fall. It is not up there at the moment, but it will be.
“As the market moves towards organisation and growth, which will be driven by technology, you are going to need compliance teams and reg teams to technology to gain sights and manage the risk.
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