by: Paul Worthington, Head of Regulatory Affairs, and Christopher Foo, International Policy Associate at Innovate Finance
Financial services firms face increasing regulatory obligations which has added to the complexity of regulatory compliance and raises questions about the best tools to fulfil these requirements.
This is where RegTech solutions have emerged. The Financial Conduct Authority (FCA) defines “RegTech” as a subset of FinTech that focuses on technologies that facilitate the delivery of regulatory requirements. RegTech is both the provision of compliance technologies by third party-vendors and the in-house tools built by financial institutions to develop technology to meet regulatory obligations. RegTech matters because with widespread adoption, it has the potential to ease and simplify compliance burdens across financial services ranging from regulatory reporting to cracking down on money laundering and meeting ESG commitments.
RegTech can also help businesses grow by reducing compliance costs. A survey in 2023 shows that compliance teams across the UK and EU are expected to grow by 30%, grow by 33% in the US, and 39% in the rest of the world, which means more money being spent on compliance functions. Financial crime compliance, to highlight one particular example, reportedly cost UK firms £34.2 billion in 2022. This was a 19% increase from 2020. These costs are most acutely felt by smaller firms, and will inevitably be passed onto consumers in one form or another.
This provides an opportunity for the RegTech market to grow as a solution to this trend, with predictions that the global RegTech market could reach $87 billion by 2028. Its growth has offered firms a multitude of solutions on how to reduce costs, deliver better compliance and increase the customer experience.
The UK is home to many RegTech firms and financial institutions that develop in-house compliance technologies. The increasing need for RegTech solutions alongside its tech and innovation prowess puts the UK in prime position to become a leading global RegTech hub. However, this potential has not been fully realised.
Achieving that requires UK regulators to further encourage and accelerate the use of compliance technologies. For example, the FCA and Prudential Regulation Authority (PRA) could look to emulate the work done by the Hong Kong Monetary Authority who have actively explored how to make Hong Kong a RegTech leader through extensive ecosystem building and adoption of RegTech solutions in financial services.
This is why Innovate Finance has published a new report in partnership with the City of London Corporation outlining a number of recommendations we believe the PRA and FCA should implement to help the UK realise the full potential of adopting RegTech in financial services.
Last year we proposed introducing a ‘RegTech test’ whenever new regulations are introduced to help regulators assess how technology can assist firms with regulatory compliance. This new report builds on that original idea.
One of the main recommendations outlined in the report is the introduction of a compliance technology impact assessment. Our proposal is that at each stage of the policy-making process, the PRA and FCA include some level of compliance technology impact assessment. It is not intended for this to be a burdensome exercise but a way of inviting or consulting with the industry to understand at a high level what some of the significant impacts of the proposed rules might be.
Another key recommendation we outline is the idea of creating a compliance technology working group. The group would provide regulators with technical support to evaluate the policy impact on compliance technology and facilitate a two-way exchange of information allowing both the working group members to understand the policymaking process more clearly and the regulators to learn more about the use of technology to meet compliance obligations.
We look forward to continuing conversations on the ideas contained in this report with industry and regulators, with a view to unlocking more opportunities for RegTech that could enable new innovative compliance monitoring tools and support regulators to fulfil their own objectives at the same time. The UK is globally known for its pro-innovation regulatory and legal regimes. Implementing the ‘RegTech test’ would be an opening for the UK to lead the world in encouraging the adoption of RegTech and compliance technologies.
