As the financial sector unfurls itself further into the realms of the digital age, Regulatory Technology (RegTech) is increasingly becoming the leader of compliance. By mitigating risks that are inherent within this constantly evolving landscape, RegTech consulting firms leverage the latest technology and insight to help innovative projects stay on the right side of the law (and keep customers safe).
It makes sense to fight technology with technology, which is why we have produced a list of the latest innovations within RegTech. The continuous evolution of industry drives innovation of compliance.
Artificial Intelligence (AI)
Perhaps the most significant game-changer in this field, Artificial Intelligence (AI), is laying a new technological foundation for RegTech. A recent report showed an increased usage of both Fintech and RegTech applications; from credit risk analysis to information security. Within this, AI is playing a key role. 56% of Fintech startups use AI in at least one business function, and RegTech is one of them.
AI has the potential to revolutionise the way UK regulatory compliance is ensured and risks are managed. One of the most compelling applications of AI in this space is the automation of regulatory compliance services, a process often burdened with complexity and subject to human error.
AI algorithms, trained on vast datasets, can efficiently parse through swathes of transactions, detecting suspicious activities in real time. AI models are unrivalled in pattern detection - in fact, they’re often so good that we don’t even know how they’re detecting them. This capability of AI to detect anomalies and potential fraud is instrumental in enhancing risk management solutions. It offers a more robust stance in an area that is paramount to financial firms in particular.
While Blockchain technology has been in the spotlight for some time now, its applications within the domain of RegTech are only beginning to be discovered. The qualities that make blockchain a revolution in the world of finance — its decentralisation and immutability — equally lend themselves to the requirements of RegTech.
Blockchain is ideal for maintaining records, tracking transactions, and ensuring compliance. The decentralised nature of blockchain makes it powerful for maintaining tamper-proof records. Moreover, it can provide regulators with a transparent and immutable log of financial activities, bolstering trust in the system and providing an unprecedented level of transparency.
In 2017, credit reporting company Equifax had a major customer data breach. In response, albeit a few years later, they partnered with a blockchain KYC solution company to build a better solution. Not just for themselves, but to help other Web3 companies with their KYC solutions through using decentralised technology.
Crypto project compliance and token issuer regulation stand to gain immensely from the incorporation of blockchain technology, enhancing both security and trust in these infant sectors of the financial industry.
Cloud computing, a technology that has long since established its versatility and value across numerous sectors, is beginning to make significant strides within the realm of RegTech. Despite hardly being a newcomer to the tech scene, its adoption in RegTech is gaining momentum quickly. This is down to its cost-effectiveness, scalability, and flexibility.
Through the cloud, financial institutions can access and deploy advanced compliance and risk management solutions in real-time. This ensures rapid responses to evolving regulatory landscapes. The inherent convenience and accessibility of the cloud facilitate seamless collaboration and data sharing among partners, essential for comprehensive regulatory compliance.
RegTech solutions hosted on the cloud offer flexibility to both traditional financial institutions and emerging sectors like crypto exchanges and wallet providers. From managing AML/KYC compliance to handling data protection regulations and consumer protection compliance, cloud-based RegTech solutions offer a multitude of benefits.
Big Data Analytics
In an age where data is deemed the new oil, big data analytics is proving to be a potent tool in transforming RegTech. Financial institutions are amassing vast quantities of data daily, with every transaction, customer interaction, and market movement. This vast trove of data, when analysed correctly, can yield valuable insights and actionable intelligence.
Whilst AI may be getting all the glory recently, what’s more important is the quality, relevancy, and size of the data that is being analysed.
Big data analytics can help financial institutions understand customer behaviour, identify patterns, detect fraudulent activities, and manage risk more efficiently. Real-time analysis of transactional data aids in ensuring compliance with securities regulations for tokens and other financial instruments. It also provides a means for efficient regulatory risk management.
In this context, big data analytics is not only crucial for regulatory compliance but also for proactively identifying potential threats and irregularities.
As the financial sector continues its digital transformation journey, the importance of cybersecurity has been increasingly thrust into focus. As financial institutions become more reliant on technology, the security of their systems has become a central concern. Technology, after all, is both an opportunity and a threat for startups. Regulatory bodies are not just focusing on financial compliance, but also on the integrity of the systems that support these operations.
RegTech solutions play a vital role in fortifying these systems, providing real-time monitoring, risk assessment, and incident response capabilities. These features are central to compliance services offered to digitally-centred businesses like crypto exchanges or wallet providers. Crypto exchanges have been frequent targets of various successful attacks, and many times more could have been done regarding cybersecurity. But, even in some large-scale attacks, the security experts are thanked for keeping “the majority” of customer funds safe.
By leveraging RegTech solutions, institutions can proactively safeguard against cyber threats while simultaneously ensuring regulatory compliance. In a world where these attacks are increasing, RegTech is poised to be an essential weapon in the arsenal of any financial institution.
In an era marked by rapid technological advancement, RegTech is unfolding as an essential component in the financial sector. As these technologies - AI, Blockchain, Cloud Computing, Big Data Analytics, and Cybersecurity - continue to evolve and mature, their integration into RegTech is becoming increasingly important. The future of RegTech is intertwined with these innovations, and financial institutions must stay informed of these trends. However, RegTech compliance firms can first and foremost assist in continued compliance, mitigating risk, and increasing a startup's credibility.