What do firms really want from RegTech?

Ben Mason

31 August 2021

In June the Financial Conduct Authority (FCA) published research into the future of RegTech from the buyers' perspective, with their Insight article 'The future of RegTech – what do firms really want?' It is an important contribution to the RegTech debate, but does it go far enough to help firms make decisions about where and how they invest in new RegTech solutions? Ben Mason, Chief Executive Officer of My Compliance Centre, analyses the FCA article and research findings.

As Chief Exective of a RegTech firm I am thrilled to see the FCA continuing to engage in the RegTech debate and investing in strategic analysis of this nature. It is perhaps easy to justify why it should - from supporting its obligations under the Statutory Regulatory Code of Practice it has to follow itself, through to helping firms it regulates to comply with the rules and deliver the FCA’s statutory obligations. If the FCA can help to identify how RegTech can cut the cost of compliance and reduce the level of non-compliance then it could create a genuine 'win/win' situation for all regulatory stakeholders, from the RegTech firms and regulatory entities through to the consumers and the FCA itself. 

What does the survey tell us?

Some of the research conclusions are reassuring but generally unsurprising. Net satisfaction with RegTech is at 95% within the firms interviewed that already have systems in place. Firms point to the fact that RegTech bridges the gap between a firm and its complex regulatory obligations, allowing the firm to fulfil its regulatory obligations more efficiently. Firms would like to see better integration of different RegTech solutions.

Other conclusions are more alarming, such as where the FCA article mentions "In the medium to long-term, most businesses (60%) believe that the RegTech sector will remain important or grow in importance in the future, with many believing that RegTech adoption will be universal among firms (52%)."

All promising you might say, but do two in five of all firms really believe that Regtech will not grow in importance? And do almost half think that adoption of RegTech will not be commonplace? It would be helpful to understand the reasons behind these responses. How informed are these people about RegTech opportunities and what would make them change their opinion?

From our experience firms are increasingly looking to have compliance systems and tools in one place, so are seeking 'one stop' RegTech offerings. However, we concur with the FCA that a key challenge for RegTech firms is how to make the leap from 'proof of concept' to 'proof of value'? My Compliance Centre has approached this in three ways: 1) case studies to help communicate where and how our RegTech creates value; 2) the development of a formalised return on investment model to help our potential clients produce a cost benefit analysis; and 3) a 'test drive' phase that allows prospective clients to use our platform and experience the difference. But we do wonder whether the FCA and other independent bodies could do more to help firms understand the wide-ranging benefits of specific RegTech use cases. 

Towards a RegTech taxonomy

It is encouraging to receive assurance that RegTech is beneficial and firms do want to make that leap of faith. The question is what can we do to promote broader RegTech adoption?

The FCA perfectly articulate the problem of having so many different types of RegTech systems and a multitude of use cases: "As RegTech continues to grow in importance to the financial services, the study of its development and benefits, and the obstacles to its adoption, will likely benefit from a more detailed and refined classification of its various facets – a RegTech taxonomy that clearly identifies the various fields of expertise and technologies that comprise the RegTech offer."

In other words, the definition of ‘RegTech’ is now so broad that it is difficult to make judgements from research that looks at the RegTech market as a whole. When a respondent answers a question about RegTech are they really considering their company’s broad use of RegTech: from transaction monitoring to regulatory reporting, from AML to compliance management, from regulatory change management to CASS reconciliations?  The FCA suggest there are 400 RegTech companies in the market giving it this complexity, but we believe the number is north of 1200 firms.

The FCA call for a universal taxonomy to address this problem. We believe this already exists to a certain extent.  The industry sub-classifications provided by RegTech Associates are one example, and Judge Business School identify ten different other sources who all provide sub-classifications of RegTech. Those classifications could inform more detailed research into the specific benefits of different use cases and the associated potential RegTech benefits.

What would we like to see?

The FCA are clear in their analysis: RegTech has the potential to help firms comply with regulations more efficiently and effectively. In other words helping to saave time and money and to reduce (non) compliance risk. 

It is helpful that the research aim was to understand what firms want from RegTech rather than telling them what they need. After all, the FCA can really only see what is front of them: regulatory reporting, specific themes they investigate from a supervisory perspective and so on - but that is not representative activities, such as compliance monitoring, that compliance functions carry out on a daily basis. 

We believe that:

  • Regulated firms listen to what the FCA say and advocate.  By not having detailed insight of the benefits of RegTech, the FCA impacts what firms do as much as when they do have detailed insight.

  • The Statutory Code of Practice for Regulators means that the FCA has an obligation to help firms manage their compliance more efficiently (i.e. with less cost) - and wnderstanding the benefits of RegTech provides a perfect opportunity for it to do that.

  • The FCA could help more by taking take the time to understand where the real costs of compliance come from. This could, primarily, answer to the question "what tasks take compliance functions most time?" it would then be able to analyse the extent to which RegTech can deliver real cost benefits for firms.
  • Research needs to be more precise and offer use cases for specific types of situation and company. To drive real insight into the benefits of RegTech, research needs to be prepared to look at specific use cases: e.g. compliance management, regulatory change, AML, and so on.  

So, our message to the FCA would be “this is great research – but if you made it specific to the most important use cases and did more to understand the ‘pain’ that firms experience in how they manage specific aspects of compliance, then you would better be able to identify more precise benefits for firms.”    

For example, when we run our ROI model with specific clients it shows a high return. If the FCA knew the ROIs achievable for different RegTech applications and use cases with different types and sizes of firm then it would be in a much stronger position to those firms maximise RegTech benefits.

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