The global regtech industry is poised for explosive growth. Corporate investment in technology solutions designed to help companies understand their regulatory requirements and stay compliant is expected to climb from $18bn last year to a massive $115bn by 2023, according to Juniper Research.
The marriage of technology and regulation is nothing new. But this tsunami of spend can be traced back to the global financial crisis. A confluence of the emergence of fintech as a disruptive force and the unprecedented barrage of rules that were unleashed in an attempt to tame the financial services beast set the scene for the growth we see today.
It is estimated that some 60,000 compliance documents have been written since the crisis – from Dodd Frank to Basel II, from EMIR to MiFID II – creating a labyrinthine web of regulation that compliance teams fuelled on manpower alone have struggled to navigate.
“At a time when financial returns on investment have been hard to generate, financial services companies have had to focus on reducing operational overhead costs,” says Mark Le Page, Advisory Director at EY in Guernsey. “That’s driving the current explosion in regtech spend.”
And it’s not just expanding compliance functions that are adding to operational overheads – globally, HSBC increased the size of its compliance team from 1,600 to 9,000 between 2011 and 2016 – but the spectacular cost of getting it wrong.
In the 10 years following the onset of the financial crisis, banks across the world have paid in the region of $321bn in fines, according to Boston Consulting Group. Manual processes and legacy systems simply no longer suffice.
The menu of regtech solutions on offer is as rich and complex as the regulatory demands they serve. From client onboarding, Know Your Customer (KYC), identity management and anti-money laundering to operational risk management and regulatory reporting, the opportunity to increase automation and reduce human error is huge.
Furthermore, regtech not only helps companies to adhere to compliance guidelines, it also acts as an early warning system to proactively spot potential threats, including fraud.
And it isn’t just financial services that’s benefiting. The sector has been subjected to the lion’s share of post-crisis regulatory burden, certainly, but it is far from the only regulated industry.
“Data protection laws, company law, health and safety – unprecedented demands are being placed on all types of business,” says Peter Mills, Chairman of Aspida Group, a Guernsey-based corporate governance and regulatory compliance services provider.
Regtech solutions are being delivered by a combination of incumbents and a rapidly proliferating start-up universe. Annual global investment in regtech businesses grew fivefold between 2014 and 2018, reaching just under $4.5bn last year, according to Regtech Analyst.
Indeed, the first regtech unicorns are now starting to emerge, with data protection specialist Netskope, valued at over $1bn, and Rubrik, valued at more than $3bn, among their number.
The sums of money being amassed in different segments reflect the regulations creating the most headaches. Just over a third of all funding went to KYC solutions in the four-year period, with just under a third targeted at anti-money laundering. Data protection regulations and MiFID II proved the third and fourth most popular.
The competitive regtech landscape is still evolving, and it remains to be seen whether start-ups or incumbents will dominate. For now, we are seeing myriad point solutions but, over time, we can expect full regulation platforms to emerge.
“At the moment, organisations have to buy multiple pieces of software and that can be difficult to manage,” says Os Lopes, a Director at Jersey-based fintech company InfrasoftTech. “The big winners will be providers that can deliver a one-stop shop.”
Regtech has been fuelled, in large part, by the incredible pace of tech advancement we have experienced over the past decade. To date, cloud computing has proved the most disruptive force. But that transition to cloud is a precursor to other transformative regtech approaches that are now starting to gain traction.
Data analytics, machine learning, artificial intelligence (AI), natural language processing and distributed ledger technologies are all being embraced as a means of handling massive amounts of data at a reduced cost and with greater accuracy.
Juniper Research estimates than the annual gross cost savings from the introduction of AI to KYC, for example, will exceed $700m by 2023.
However, for an organisation to be in a position to take advantage of new and exciting technologies, there can often be a lot of groundwork to be done. Ensuring a business has the bandwidth to cope with change can be challenging.
“There’s a lot of talk about automation and artificial intelligence, but in reality a large part of all this is still being done in Excel,” says Dan Hare, Founder of Continuum, a Jersey-based company that helps businesses turn their data into usable information. “Start-ups are arriving in droves, but it’s not always a case of ‘build it and they will come’. The pace of change at organisations can be incredibly slow.”
It’s true that adopting regtech is a journey. But as new rules continue to proliferate – it is estimated that 300 million pages of regulation will be in existence by 2020 – it is a journey that must be taken.
“Spending on technology to deliver compliance used to be considered a grudge purchase, but now it’s not just about compliance, it’s about proactively identifying where risks are coming from,” says Mills from Aspida Group
Indeed, for offshore financial centres such as Jersey and Guernsey, there is a significant opportunity to embrace regtech as a competitive advantage.
“The Channel Islands must offer lower-cost, efficient financial services solutions,” says Le Page. “In the past, firms found competitive advantage from straight-through processing. Now, regtech can provide the next efficiency gains.
And Jersey and Guernsey have the ecosystem to achieve that.”
This piece appears in the August edition of Business Life, click here for more Business life features.
Trainee Recruitment Drive If you are a school leaver, graduate or are looking for a career change and you have the drive and ambition to become one of our next generation of consultants, come and join
The Guernsey Finance Industry update on the 19th January gave a very loud and clear message that Guernsey is obtaining good international engagement and is very much ‘open for business’.
Our Green Appraisal Scheme 2022 results are in! We have rewarded many colleagues with their extra days holiday and gift vouchers for taking the right steps towards helping our Island become ‘greener’. They earned points
