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(This article is the second one of a series about regulations and Regtech)
We became interested in Regtech when we found out what an exclusive and useful niche field it is. Good players not only need great technological skills but also an in depth understanding of regulatory requirements, current functioning of financial institutions and design principles. Regulations have not been entirely digital in nature and are a good mix of monitoring quantitative and qualitative data points. Any implementation should be designed around the functional points before bringing technology in play to solve the problem in hand.
There is a great example of design and behavioural science trumping technology, given by Wendy Jephson (Co-founder of Sybenetix) regarding a team of technologist and behavioural scientists that was called to find a solution for a woman suffering from short term memory loss who used to walk while sleeping and sometimes even left the house. The family was concerned and wanted to find ways to prevent her from getting out. While the technologists were discussing to wire the house, install sensors, and keep her continuously monitored, the behaviourists and the family came up with a simple and effective solution. As the woman was suffering from short term memory loss but she was still having her long term memory intact, they suggested to put a sign board reading “Gents Toilet” on the front door that would prevent her from getting out as she was accustomed to not going through a door with such a sign.
Similarly, while dealing with regulatory matters, it’s very important to first look at problems from different perspectives, collect info about all the details and then design the best possible solutions. In many cases technology is just an enabler, not necessarily the cornerstone feature. In banking we tend to analyse the current state of the technology stack, the infrastructure, the regulatory requirements, the interconnections between teams, the operational model, even the prevailing culture, and only afterwards, we design an efficient tech solution, keeping in mind that the environment needs flexibility and should allow for quick adaptations. This is the best path to creating long term solutions.
Let’s look at a few examples.
KYC processes are a pain for clients, and a pain for firms. In current implementations, customers have to provide physical evidence of identity and keep repeating the same procedures multiple times with different agencies and institutions. This multiplies the risks of identity fraud from people who can get access to our past historical data points exploiting un-sufficient standards of safety and security.
Designing a solution for such an activity requires multi fold thought. Any possible alternative should incorporate ease of usage, digital identification, be shareable and have high security standards. Eventually it should have a decentralized implementation too. Once requirements, environment and targets are identified, it’s then time to start looking at the available technology to implement a solution. Trunomi for example, has used a device based authentication to solve this issue with a decentralized implementation of identity roaster.
In another field of finance, capital markets, Regtech solutions are in high demand.
On the sales side, marketers need to ensure that no information passed to clients can be cause of regulatory breaches. They need to make sure that they are selling the right set of product to the right clients, by questioning the appropriateness and suitability. Assuming that the questionnaires used are not designed too poorly, so that clients’ preferences reflect what they need, the value of this analysis should be enriched using past data about clients or by monitoring their behavioral data. Furthermore, recording and archiving solutions as the ones developed by Qumram (recently acquired by Dynatrace) ensure that clients and salespersons can recover any data about their past interactions and have these instantaneously processed.
Looking at the typical trading desk instead, traders need to consider more than 200 data points to be compliant with some of the major regulations. Its such an exorbitant task that trading could eventually be only performed by compliance officers, unless trading applications could transition into compliance-driven trading-platforms. Such platforms could raise warnings or even prevent the trader from executing deals in breach of regulations. Such implementations would require a combination of technologies, such as big data, data analytics, machine learning, IoT and artificial intelligence.
In these and other environments, using predictive analytics, Regtech’s can combine the complex information that a bank has with data from previous regulatory failures to see potential risks ahead and highlight areas to focus on. Behavioural science can also be used to plug in data points about employees’ current and past behaviour to increase the accuracy of predictive models. Sharing of data points between institutions using technologies like the cloud, in aggregated, anonymised fashion, or with the authorization of the data owners could further improve accuracy and the potential of the analysis.
Tech experts have bet hard on Regtech solutions across industry: Conrad Whelan, one of the first engineers to join the UBER team has invested in icomplyico, a Regtech firm to help ICO industry with compliance.
How Regulators see the Regtech world
Regulatory authorities across many of the developed nations have been strongly receptive of the Regtech industry. The FCA realised the potential of Regtech as early as 2015, and invited inputs from the players in the sector, to better scope the support needed from the institution. Multiple regulators are now running Proof Of Concepts to gain practical insights into the potential of the solutions and regulatory sandboxes have been launched to help Regtech and Fintech players to come together with the financial industry and explore the mutually beneficial possibilities.
With the vast amount of data regulators are gathering and with an increasingly complex and growing fintech industry, there is a natural need for the authorities to scale up and use technology itself to manage their data and their functions in the most efficient manner.
On the other hand, Regtech players are asking regulators to use digital format for regulations, to make their implementation easier, faster and more efficient.
Current State of the Industry and major players
Image credit : www.gtreview.com
The size of the market opportunity is exciting. According to one estimate, the global total spent annually on regulatory compliance technology will rise from $50 billion in 2015 to $118 billion in 2020.
The pie chart below provides a breakup on the fields targeted by the Regtech industry as reported by a study done by Deloitte on around 150 players. As seen, Identity management and Compliance are two major sectors targeted by companies.
Some of the major players in each of the area are as provided below:
Real time monitoring and tracking of current state of compliance and upcoming regulations
|Aesthetic integration||Analyses financial algorithms to ensure regulatory compliance|
|Albany Group||Albany’s Connect platform makes governance and oversight of third parties effortless|
|Alyne||Software as a Service for Cyber Security, Risk Management and Compliance|
|Aprivacy||Information security and tracking service. Secure e-statement, secure document sharing and email|
|Behavox||Compliance reporting and assessment tools, holistic employee monitoring and risk scoring|
|Capnovum||Regulatoy watch based on artificial intelligence and automation|
|Checkrecipient||Artificial intelligence and machine learning tool to analyse historical email data and automatically identify anomalies|
|Drooms||Data room provider that allows highly secured access to confidential documents and safe third party access|
|Flextrade||Order management system for trading with build in compliance tools|
|Qumram||Digital audit trail of all online, mobile, and social interactions|
|Seqvoia||Advanced fund data tools, including automated document creation for KIIDs, PRIIPs KIDs, factsheets and fund prospectuses|
|Tillr||Web-app that automates and optimises audits, assessments and inspections to assist with regulatory compliance|
|Voitrax||Analyses voice and other trading communication data to ensure compliance with Dodd-Frank and other regulatory requirements|
|WordFlow||Converts rules and regulations from pre-web formats into mobile optimised webpages and links them to related regulations and legislation|
Detect compliance and regulatory risks, assess risk exposure and anticipate future threats
|AlgoDynamix||Risk analytics that detects disruptive events in global financial markets and anticipates price movements|
|AlgoSave||Provides Expected Credit Losses calculations and computation of bank Risk Capital and RAROC|
|Ayasdi||Helps companies use machine intelligence and topical data analysis for risk mitigation and regulatory compliance|
|Bearing point||Solutions specific to banks, insurers, financial services providers, central banks, and supervisory authorities across the regulatory value chain|
|Fintellix||Compliance, Risk & Analytics Products and Solutions for the Global Financial Services Industry|
|Modelity technologies||Platform for financial modelling and portfolio risk analytics|
|OSIS||Platform for credit risk analysis and credit opinions, asset quality review and stress testing|
|Redowl||Analyses structured and unstructured data to provide holistic overviews of human risk and regulatory compliance|
Identity Management & Control
Facilitate counterparty due diligence and Know Your Customer (KYC) procedures.
AML and anti-fraud screening and detection.
|Accuity||Services for payment efficiency, compliant transactions, bank counterparty insight and AML screening|
|Alacra||Workflow applications for client onboarding, client screening, vendor risk management and front office business research|
|Arctic intelligence||Software to assist organisations in meeting financial crime compliance obligations and manage risk|
|Digital reasoning||Uses AI and machine learning to analyse customer information from structured and unstructured data sources|
|Fenergo||Regulatory Onboarding, Client & Counterparty Data Management and Client Lifecycle Management solutions|
|InvestGlass||Uses AI to automate the profiling of prospective and existing clients|
|KYC Chain||KYC-Chain uses distributed ledger technology to provide businesses with secure KYC procedures that gives users ownership of their identity data|
|Mitek||Mobile identity verification software solutions|
|Signyz||Cloud-based real-time client authentication using AI and cryptography|
|Tradle||Incorporates blockchain technology to facilitate and simplify user-controlled KYC|
|Trunomi||Interact with customer personal data using a consent-based data sharing platform|
Enable automated data distribution and regulatory reporting through big data analytics, real time reporting and cloud.
|Reporting software for (AIFMD, FORM PF, Solvency II, COREP, Finrep, HMRC, iXBRL Reporting)|
|Cappitech||Trading and reporting solutions to both buy and sell side and for major service providers|
|Commcise||Commissions management and reporting solution|
|Solution that provides order management and information service to the fund industry|
|Lombard Risk||Solutions for automation of regulatory reporting and optimisation of cross-product collateral management to meet regulatory requirements|
|Quan Template||Gathers data from disparate sources and employs AI to analyse the information and automatically generate regulatory reports|
|Vizor||Enables financial authorities the supervision of financial companies with a web based data submission portal and real-time validation|
Solutions for real time transaction monitoring and auditing.
Leverage the benefits of distributed ledger through Blockchain technology and Crypto currency
|Ancoa||End-to-end integrity validation to prevent risks of market abuse, fraud and operational shortcoming|
|Chainalysis||Real time analysis of blockchain transactions and the customers behind the transactions|
|Elliptic||Identification of illicit activity on the Bitcoin blockchain|
|Feedzai||Incorporates Big Data and machine learning AI to combat fraud and meet compliance in real-time|
|Monetsu||Solutions for crypto-currencies using an independent approach to blockchain|
|Neuroware||Blockchain and distributed ledger solutions|
|Sysnet Global Solutions||Cyber security and compliance solutions|
Players are creating services both for Regulators to analyse submitted data, help them keep a hawk eye on the market and for financial institutions to remain compliant. Also noticeable is how Regtech’s are looking at being predictive instead of just being reactive as was the case with most compliance pre 2008.
There are companies in almost all of the aspects of this sector, and players are trying to concentrate on precise value propositions. This helps them to remain focused and produce high standard solutions although it does raise some difficulties at financial institutions that have to deal with many nimble providers and accommodate different tech stacks in their legacy infrastructures. On the other hand, this is the direction where the industry is moving and use of microservices infrastructures and continuous development frameworks can help cope with that, as we highlighted in one of our previous posts.
There will be a future, not too remote, when compliance teams will have direct access to real time monitoring tools that will show the health status of most activities around the bank. We like to imagine that any misconduct could be instantaneously blocked even before it took place and we are passionate about taking steps in that direction.
Our founding team has matured with more than 25 years of total experience in the financial markets, dealing with risk, regulation, structuring, sales and technology. With our deep understanding of the industry we are aptly placed to help you streamline your regulatory solutions. Reach out to us at firstname.lastname@example.org to tell us more about your project.