Playing Catchup with Regtech

The global market for regulatory technology [regtech] is booming and according to some estimates will reach $9.88 billion during 2022 at a compound annual growth rate (CAGR) of 25.1%.

The market is expected to expand to $23.76 billion in 2026 at a compound annual growth rate (CAGR) of 24.5%.

However, the APAC region has been particularly receptive to this branch of technology which allows financial institutions to better manage an increasingly complex and draconian regulatory environment.

The APAC region is on a serious growth trajectory. In 2000, Asian economies accounted for just over a third of all world output (after adjusting for price differences. However, today Asia’s contribution to world output will be more significant than the rest of the planet’s economies combined.

However, one would be mistaken to assume this means APAC is a homogeneous region. In fact, the Asian continent is home to some of the biggest financial discrepancies in the world, ranging from global financial centers such as Singapore, Hong Kong, and Tokyo, to locations with enormous populations of largely unbanked people.

This discrepancy is a big part of the reason APAC has become such a hotbed of fintech innovation. Both sides of this bifurcation stand to benefit from greater access to financial services through technology, and regtech has a significant role to play within that ecosystem.

Because of the vastly differing regulatory requirements across the region, financial service providers can benefit from technology which can effectively streamline and automate these matters. While regulators in developed markets are focused on avoiding the risks associated with cybercrime, to money laundering and terrorist financing, and the sustainability of the financial system in general, developing regions are trying to address piecemeal regulations which are born of a lack of expertise when it comes to these issues.

One of the biggest factors driving the shift towards regtech is the proliferation of digital banks, which has been accelerated by the global COVID-19 crisis. As people were forced to stay at home to help prevent transmission, digital banks have stepped in and grabbed a significant slice of the market.

This has led to an environment where regulatory bodies are trying to play catch up to an industry which is rapidly accelerating into a more online and technology driven animal.

Take the issue of onboarding new clients for example. Before the onslaught of digital banks, many brands would insist a new customer attends a physical branch to present identification documents, etc. However, we now have a world where all those processes can be conducted remotely and customers never have to set foot in a branch – in fact, many of these digital banks don’t have a branch you could set foot in, even if you wanted to.

“There’s a lot of new tools and new regulation to allow us to onboard customer remotely, do know-your-customer checks remotely, and the monitoring,” said Sim Suen, Lead, Regulatory Compliance, Mox Bank. “The credit approval process has also seen new processes emerging, and because the risk assessment is changing, the regulators are seeing an increase in technology risks, the use of cloud, and operational risk. Because of these changes and [evolving] customer behaviors, the inherent risks of running a bank change as well. In that new environment, a lot of reporting needs to be provided to make sure that we are doing the right things and doing it safely.”

Some of the regtech technologies being embraced in this transformation include natural language processing, robotic process automation, and artificial intelligence. These innovations can be applied to a range of regulatory tasks ranging from KYC and document search to compliance tasks automation and monitoring.

Insider trading and market abuse is continuing to be a major area of focus for regulators in 2022. In a world where the workforce is more remote and dispersed than ever before – thanks largely to the pandemic – it’s now more difficult than ever to monitor behavior. Combine this with an increased reliance on electronic communications and the ability to evade surveillance mechanisms and abuse can easily proliferate.

Regtech can effectively integrate multiple surveillance solutions and empower governing bodies to monitor trading activity more effectively in this transformed landscape. Machine learning, NLP, RPA, and other technologies empower improved data sharing capabilities and help firms identify red flags more easily.

Another area which is sorely in need of regulation is the world of cryptocurrency and NFTs. It might occur that the entire concept of blockchain based assets collapses in on itself before effective regulations can even be introduced, but the current wild west of scams and frauds cannot be allowed to continue unabated.

Whatever proponents may convince themselves, the legal ownership status of blockchain assets is not set in stone and clarity is urgently needed if these technologies ever expect to be taken seriously by anyone outside of their tulip bubble.

As the effects of man-made climate change become ever more keenly felt, ESG regulations will also become ever more present in our lives. Regtech will make it easier to enforce environmental standards across multiple regulatory environments and help governing bodies better manage destructive behaviors – blockchain, we’re looking at you.

Cybersecurity and information security are become ever greater concerns and several large scale failures in this area have hit the headlines in recent year – HSBC being fined $85m for failing in its anti-money laundering processes in December 2021 being a notable example. This makes a solid case for the inclusion of regtech platforms to help financial organizations fulfil their obligations when it comes to security and increase effectiveness of infosec policy.

Regtech is going to become an increasingly vital component in a world where the regulatory environment is becoming increasingly difficult to navigate. This is especially true in a region such as APAC where there can exist such disparity in circumstances and regulatory frameworks across the sector. With technologies such as AI, NLP, RPA, etc. working behind the scenes, financial brands can be confident they are conducting business in a manner which is fair, legal, and profitable.