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Regtech & the Disruption of Compliance

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Regtech recently became a trendy term commonly associated with the financial sector. Summits, events, discussions and reports around this new field are popping up everywhere, including in Luxembourg. But what is regulatory technology (regtech) all about? Does it only impact banks and funds? Let’s try to get a better understanding of regtech and how it creates positive opportunities for Luxembourg.

Context

Scandals from previous financial crises pushed supervisory bodies to increase regulations and rules within the financial sector (e.g. Basel III, MiFID, KYC). With the digitalization of our economy, additional concerns about data and privacy protection emerged (i.e. GDPR and e-signature), broadening the regulatory impact beyond the financial sector.

An exponential increase in the amount of data companies must process ensures that the risk of non-compliance will get more and more significant with time.

The cost of regulatory constraints and potential non-compliance penalties triggered a new need for agile risk management and compliance solutions.

Regtech & the digitalization of regulatory functions

Regtech follows in the path of fintech and describes innovative companies and initiatives that offer automatized and smart solutions in the risk-management and compliance domain.

From asset-management reporting to risk cartography, improved in-house document tracking to automatized updates of regulatory changes, regtech covers a broad array of services that bring gains in terms of agility, speed and cost.

Innovative tech solutions to regulatory constraints

Regtech relies on the development of technologies to successfully comply with ever-changing market needs – innovations like machine learning & AI, big data, cryptography and blockchain.

For instance, autonomous technology solutions, such as big data or machine learning, which uses artificial intelligence, provide a deeper and more accurate data analysis of companies while developing self-learning and adaptive capacities. Machine learning is characterized by an ability to imitate human behavior through modeling good practices and learning from past mistakes.

For instance, those solutions are applied in KYC and AML. A technological solution can now detect all in-house and legal rules/directives in a database with which companies need to comply. After identification, the software can automatically carry out an inspection and trigger an alert in case of nonconformity. This process is also used in hedge-fund supervision to sniff out rogue traders (as illustrated during the recent acquisition of Sybenetyx by Nasdaq).

The risk of non-compliance and the huge penalties associated are also elements that drive companies to regtech solutions. Adaptive and global solutions (i.e. the automatic application of local law and regulatory changes in multiple jurisdictions) are highly valuable in the world of compliance management.

Many tasks were, until recently, manually managed and time consuming. Regtech solutions therefore save companies time and money.

Win-win situation

With regtech, compliance and risk-management functions are redesigned and opened up to new innovative players. Previously handled in legal and compliance departments, it can now be externalized to regtech innovators that bring efficiency, savings and a new experience to a domain that was constantly viewed as a money pit.

Regtech players are positioned at the junction of regulatory bodies, financial institutions and innovative technology centers. Their solutions manage to satisfy multiple needs and requirements:

  • Regulatory bodies accomplish their mission to protect customers
  • Financial institutions, e-commerce & other entities that fall within the regulatory scope receive cost-saving, innovative solutions

Companies must be willing to outsource functions involving their sensitive data in order for the regtech universe to expand and flourish. The success of regtech will ultimately hinge on its ability to gain trust.

Big opportunities for Luxembourg

The recently launched Luxembourg House of Financial Technology (LHoFT), a public-private sector initiative aiming to foster innovation and develop solutions, proves that Luxembourg’s financial community has big fintech/regtech ambitions.

Leveraging local fund and banking experience, key e-commerce players and public-private initiatives, regtech actors in Luxembourg should find all the conditions needed to succeed. Promising companies (i.e. Snapswap, Governance.io, kycTech and KYC3) have already emerged in this sector and expanded into international markets.

Let’s hope that this is only the beginning for Luxembourg.


This article was first published in the Autumn 2017 issue of SILICON magazine. Be the first to read SILICON articles on paper before they’re posted online, plus read exclusive features and interviews that only appear in the print edition, by subscribing online.

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