Regtech (Regulatory Technology)

Regtech – short for regulatory technology – refers to companies and technology solutions that manage regulatory requirements. In finance, Regtech aims to help financial institutions carry out mandatory monitoring, reporting, and other AML requirements more efficiently in order to keep costs down.

‍

‍

Why is Regtech Important for Compliance?

Regtech for AML compliance is important because achieving compliance through manual processes is very costly and time-consuming. Financial regulations are constantly changing, so FIs need to know which rules changed (or were added) and whether or not their anti-fraud/AML program adheres to those rules. In addition, failure to comply with financial regulations can result in very expensive fines and other penalties.

‍

The good news is that several compliance processes, especially those related to KYC (such as ID verification and transaction monitoring), are repetitive and can easily be automated. This allows financial institutions to devote more of their money and time to higher-priority tasks without worrying about whether their anti-fraud and AML programs meet required standards.

‍

Regtech compliance makes use of many cutting-edge technologies, such as:

‍

• Artificial intelligence, including machine learning
• Big data analytics
• Blockchain and smart contracts
• Cloud computing
• Voice and text recognition

‍

Together, these technologies help financial institutions reduce the time, money, and personnel commitments required to stay compliant with anti-fraud and AML regulations. Here’s a look at how Regtech works at different levels of an FI’s operations:

‍

‍

Step 1: Onboarding

Bringing on new financial customers requires verifying their identities and assessing their potential risk of involvement in financial crime. Applying Regtech to identity verification can automate the customer onboarding process while learning from historical case management data to detect identity anomalies fairly accurately.

‍

‍

Step 2: Monitoring

Financial monitoring doesn’t just involve an institution keeping tabs on its own transactions and customer risk profiles. It also means surveilling employees for internal threats; confirming new regulatory additions and changes; checking sanctions lists for information that may change customers’ risk levels; and surveying market dynamics for trending financial crime schemes.

‍

Regtech can help FIs get information regarding these factors sooner so they can act quickly to prevent problems that may arise.

‍

‍

Step 3: Detection

Financial institutions need to be able to read signs in the transactions they process that suspicious or criminal activity might be going on. This is rarely as easy as it sounds, as criminals are constantly coming up with new schemes. 

‍

Regtech involving artificial intelligence – especially white-box machine learning – can use data on how previous alerts and cases were handled to develop rules for detecting (or even predicting) which transactions have a high probability of involving illegal activity.

‍

‍

Step 4: Reporting

Part of having a good AML compliance program is keeping reports of situations that come up and actions that are taken in response. On one hand, these records serve as data to reference – or even train machine learning models on – when trying to detect, predict, or handle suspicious transactions. On the other hand, they provide a “paper trail” to show regulatory authorities that a compliance program is being used and conforms to the proper standards. 

‍

Regtech can help with this by automating time-consuming document management work. So whether for training or compliance, reports get made, sent out, and destroyed precisely when needed.

‍

‍

Step 5: Process control

Using Regtech for risk management makes each of the above processes more efficient and more consistent. This not only mitigates threats falling through the cracks and makes compliance easier, but also simplifies scaling up a financial institution to deal with higher velocities and volumes of information.

‍

The financial Regtech applications discussed above provide several benefits to institutions. Here are four key ones.

‍

• Adaptable regulatory compliance: With rapidly changing financial regulations, it’s extremely challenging for financial institutions to stay abreast of all applicable requirements (especially for companies operating in various jurisdictions). Regtech helps FI teams stay aware of the latest regulations that apply, and ensure their tech stack reflects current compliance standards.
• Automated compliance tasks: Essential AML tasks, especially those regarding Know Your Customer, can take up a lot of resources – namely, employees, their time, and the money they have to be paid for that time – if done primarily manually. Automating KYC through Regtech frees up those employees for higher-priority tasks while lowering the risk of human error.
• Better customer experience: Onboarding new financial customers is a delicate balance between requiring enough ID credentials to properly verify who they are and making the process smooth enough that they won’t abandon it. Using Regtech helps to avoid redundancies in customers presenting their ID credentials, while ensuring proper Customer Due Diligence is done, by organizing data from disparate sources.‍
• Increased transparency: Some other benefits of Regtech automating transaction monitoring and other KYC processes, as well as centralizing and aligning data, are that customer activity reports can be more coherent and produced more often. This not only gives a financial institution more timely insights but also creates more evidence of its compliance program in action for when the business is audited.

‍

‍

By automating repetitive AML tasks, financial Regtech solutions allow for smoother customer onboarding, more transparent audit processes, less human error, and overall more coordinated compliance programs. All of this makes complying with financial regulations much less of a drain on a financial institution’s time, money, and human resources. Consequently, an FI can focus on high-value objectives and keep up with the pace of business.

‍

‍