Despite the current global economic and business challenges, which have had an impact on venture capital funding and investments (with a sharp drop in the first quarter of 2020, and more turmoil no doubt to come), RegTech investment has continued to be robust overall. This is not surprising given the increased operational and regulatory risks posed by current conditions that have heightened focus on certain regulations and regulatory guidance (with business process continuity and resiliency as obvious areas) that firms are compelled to now look at. This is driving further investment in RegTech that can help both identify and address regulatory areas.
In prior blog posts, we have questioned whether RegTech is truly delivering on its promised value and what value it can deliver going forward. Is RegTech part of a bubble, or is it a legitimate, emerging technology? Where does RegTech currently fall within the Gartner Hype Cycle? (We believe it is still in the “Innovation Trigger Stage” but heading towards “Peak of Inflated Expectations.”)
Regulators increase involvement in RegTech
One of the most encouraging signs for the future of RegTech is increasing involvement of regulators in RegTech initiatives. Regulators around the world have been encouraging and supporting RegTech development and implementation.
Last December, for example, the New York Department of Financial Services (NYDFS)—the financial and digital currency regulator for the State of New York—was reportedly developing RegTech solutions aimed at enhancing its supervisory and oversight capabilities. The NYDFS was said to be looking for a director to design, implement, and oversee testing and selection of RegTech solutions.
And, in the United Kingdom, the Bank of England (BoE) has been working on its own RegTech strategy to improve its regulatory effectiveness and efficiency, looking at different approaches including natural language processing (NLP) and machine-readable rules and guidelines. The BoE said recently that regulatory reporting and oversight costs the British banking sector from $2.6 billion to $5.9 billion annually.
Endorsement by regulators—and adoption by regulators of some RegTech approaches—should go a long way toward resolving any remaining doubts.
Meanwhile, the Australian Securities and Investment Commission (ASIC) recently highlighted the “enormous potential” of RegTech to help Australian financial services firms manage compliance processes more efficiently and improve overall outcomes.
Similarly, in 2018, the UAE government launched an initiative led by the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) to develop a blockchain-based, electronic Know Your Customer (KYC) solution. This would offer financial institutions a single location in which customer identification and verification could be performed on a one-time basis. Elsewhere, the Dubai International Financial Center (DIFC)—a financial “free zone” in Dubai—introduced an accelerator called FinTech Hive with two RegTech companies. FinTech Hive also provides participants with access to an investor network, including the DIFC’s own $100 million FinTech Fund.
A remarkable journey—thus far
While there is no concerted global push to embrace RegTech, individual agencies are incorporating new technologies into their own initiatives and are encouraging the firms they oversee to do the same. Regulators and private sector firms, after all, share the same goals of managing costs, streamlining processes, and reducing risks and adverse events.
RegTech has enjoyed a remarkable journey thus far and still has a bright future, but questions continue to linger about its legitimacy and ability to deliver return on investment. Endorsement by regulators—and adoption by regulators of some RegTech approaches—should go a long way toward resolving any remaining doubts.