While social networking has devolved into a minefield for compliance at financial institutions, increasingly they’re turning to machine-learning to monitor social media data feeds and news articles for possible risks.
It’s one of many ways that regtech — innovative technology to make compliance easier and more efficient — is transforming adherence of financial institutions to the multitude of rules imposed by the authorities. In fact, one capability of regtech is to incorporate new rules Opens a new window immediatelyOpens a new window , with changes feeding directly into software programs.
Technology can help curb money-laundering, track suspicious activity, strengthen know-your-customer due diligence and keep on top of regulatory reporting. A Juniper Research study estimates that regtech will deliver cost savings of $1 billion on banking and property sales KYC checks by 2024.
The authors forecast that with little sign that rules will be relaxed in the future, apart perhaps from some paring back of the US Dodd-Frank Act, regulatory spending will grow from $278 billion now to more than $316 billion annually in 2024, with regtech spending rising to $127 billion.
Compliance departments bolster IT resources
This means compliance departments are hiring greater numbers of data and technology experts to manage the applications and their expanded workload. Using outsourced technology still requires financial institutions to update and monitor their procedures.
Deutsche Bank Securities, for instance, is using regtech to integrate chatbotsOpens a new window to provide clients with quick answers for standard questions. Open access to APIs enables customers to enter or call up information directly. Digital document management eliminates the need for manual transfer of reams of paper. Regtech helps the bank stay ahead of the curve on new client protection rules.
On the other side of the fence, regulators are also using technology to make the data collected more transparent. A bipartisan bill has been reintroduced in CongressOpens a new window to authorise the Treasury secretary to create uniform, machine-readable standards for securities, commodities and banking regulators. The goal is to provide better information for customers and reduce compliance costs for firms. Such a system would make it easier to identify wrongdoing, experts say.
Separating winners from losers
The transformation goes even further, however. Deloitte says regtech will become a real business differentiatorOpens a new window  rather than a simple support function as rule-making continues to expand. They divide the functions of regtech into compliance (keeping track of rules and their adherence), risk management (calculating exposure and risk reporting), identity management and oversight, transaction monitoring and regulatory reporting.
The volume of regulatory change volume has increased by nearly 500% since the crisis, Deloitte says, while the biggest global banks have paid out $235 billion in fines and compensation for regulatory breaches. This means regulatory risk management must be integrated into business models if institutions want to survive.
The combination of increased regulation, larger fines for non-compliance, and the need for financial institutions to cut costs has prompted a wide range of vendors to fill the gapOpens a new window  between comprehensive off-the-shelf solutions from the biggest tech companies and the in-house solutions built by major banks.
Regtech is usually seen as a subset of fintech, where the US is lagging as a result of regulatory turf wars. The European Union has set a faster pace in both areas. Deloitte ticks off the alphabet soup of new or revised EU legislation, such as PRIIPs, UCITS, PSD, AIFMD and the succession of AML directives.
It was the UK’s Financial Conduct Authority that popularized use of the term regtechOpens a new window when it called for input in 2015 on how to support it. Ultimately, the regulators too will have to adapt in the way that they implement and enforce regulationOpens a new window .