Regtech is growing – but what next for the sector?
Since the financial crisis of 2008, regulatory compliance has become top of the agenda for banks and other financial institutions across the globe. Business and operating models have been transformed to mitigate risk and adhere to new and evolving regulatory requirements – and this trend is only set to continue in the coming years.
The demand for solutions that address the mounting complexity of these new regulations has given rise to a new and rapidly growing area of financial technology: the regulatory technology (regtech) sector. Regtech’s global market size is expected to grow from US$5.46bn globally in 2019 to US$28.33bn by 2027, with spending estimated to make up more than 50% of global compliance budgets by 2026.
So, what are the forces driving this growth and how should we expect regtech to evolve in the year ahead?
Regtech solutions are not just a ‘nice-to-have’ – complying with regulations is a mission-critical part of business operations and is often beyond the reach of legacy technology. Since the 2008 crash, global regulators have stepped up their scrutiny of banking practices and imposed more than $300bn in fines and penalties on banks. To avoid penalties, financial institutions have increasingly turned to technology-driven solutions that can help maintain the accuracy of regulatory disclosure and meet compliance requirements.
In addition, many G20 regulatory reforms are currently under way. The amendments to the Commodity Futures Trading Commission’s swaps reporting rules (CFTC Rewrite) in December 2022 – as well as upcoming changes to the European Markets Infrastructure Regulation (EMIR Refit) and to several Asia-Pacific reporting regimes in 2024 and beyond – are part of a global overhaul of G20 trade reporting rules. Regtech is playing a central role in helping firms comply with these ever-evolving standards.
The realisation that constant regulatory changes are a fixture has significantly boosted regtech applications. According to the Global City 2021 RegTech report, almost two-thirds of regtech firms experienced sales growth in 2020. Meanwhile, KPMG expects regtech “to continue to remain hot” in the wake of macroeconomic headwinds and upcoming regulatory changes.
Regulators and supervisors themselves have ramped up their involvement across a number of regtech projects. Several of these are in an advanced stage. Following their successful digital regulatory reporting pilot, the UK’s Bank of England and Financial Conduct Authority are executing on a strategic Transforming Data Collection (TDC) plan. The European Commission’s Machine Readable and Execution Reporting Requirements (MRER) proof-of-concept is leading to actionable recommendations to the various European Supervision Authorities. These types of initiatives demonstrate regtech’s real-world impact, providing the catalyst for the industry adoption of such solutions.
Digital regulatory reporting: a flagship use of regtech
Typically, three common denominators are the hallmark of successful regtech implementation – collaboration, standardisation and the spur of regulatory change. One of the most successful implementations that features all three is the Digital Regulatory Reporting (DRR) programme.
Regulatory reporting is a complex and expensive area of compliance. For instance, the Bank of England estimates that regulatory reporting activity costs UK banks a minimum of £2-4.5bn annually. Reporting firms face an array of overlapping, often ambiguous and ever-changing data requirements across jurisdictions. For every reporting regime, firms must typically sift through hundreds of pages of legal text, which they must then manually interpret and code in their IT systems.
Instead of each firm individually interpreting the rules, DRR allows market participants to work together to develop a standardised interpretation of the regulations and store it in an openly accessible format as both human-readable and machine-executable code. As a result, DRR is also emerging as a primary tool to help mitigate any divergence between jurisdictions. Collaboration works because there is no competitive advantage in reporting differently from other firms – in fact, using a standardised interpretation reduces non-compliance risk.
Following ISDA’s launch of the full open source version of the DRR model, with an initial focus on the CFTC Rewrite which went live in December 2022, firms can now leverage DRR in a live production setting.
Regtech’s short-term hurdles
Although technology is a vital enabler of compliance, the sector needs to overcome several challenges. For example, over 10% of regulated institutions cite complex onboarding processes as a major hinderance. Vendors and financial institutions will therefore need to find ways of ensuring that firms have the right infrastructure in place to integrate regtech into their operational systems.
Likewise, although regtech has grown rapidly, many financial services firms lack full understanding of how these solutions work and the benefits they bring. According to the Financial Conduct Authority, 41% of industry participants believe that regtech companies could communicate their offering more clearly.
Emerging technologies naturally come with barriers towards widespread rollout and adoption, but this should not detract from the exciting opportunities that regtech presents. Looking ahead into 2023 and beyond, programmes like DRR are a strong indicator that regtech will continue to lead the way in financial innovation.
About the author
Leo Labeis is the Founder and Chief Executive Officer of regulatory technology firm REGnosys. Prior to founding REGnosys in 2016, Leo was the Global Markets head of MiFID II implementation at Goldman Sachs.
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