In the era of the digital age, the future of compliance programs will depend on emerging technology. Regulatory technology (RegTech) exists to help the financial industry perform within compliance of global regulations. In the past few years, RegTech solutions have been adopted in the financial sectors' regulatory monitoring, reporting and compliance efforts. It has played a significant role in the financial service industry as an efficient and less expensive mechanism to ensure financial services remain compliant. Furthermore, this technology is also expected to help the public sector modernize its compliance programs.
The central technology in RegTech is designed to facilitate regulatory compliance programs by using artificial intelligence (AI), cloud computing, blockchains, machine learning, big data analytics, and natural learning processing. RegTech solutions include the following five methods: surveillance and monitoring, customer identification and anti-money laundering (AML) compliance, regulatory intelligence, reporting and risk management, and investor risk assessment. This technology forecasts financial risk to prevent detrimental outcomes.
RegTech is one example of an industry established around technologies that deliver an automated regulation solution. It helps to reduce risk and potential threats by combining complex data and activities conducted online. The information is further analyzed in order to determine the best possible actions that market participants should choose from.
Following the 2008 financial crisis, RegTech startup companies have continued to provide business service firms with innovative technology solutions to address regulatory issues. The RegTech sector has generated over $5 billion in funding between 2013-2017 and it is projected that regulatory compliance software will gain $120 billion by 2020. For instance, some of the widely-used platforms that focus on financial crime prevention such as NetGuardian, ComplyAdvantage, Chainalysis, Hummingbird, Ayasdi, and Elliptic can perform AML screening and monitoring solutions through a risk database. Other platforms provide tools for compliance management, reporting, identity management, and risk management.
The US and Europe have established themselves as the base of operation to the majority of the top 100 RegTech companies. The UK will host the biggest global RegTech summit in May 2019. This summit will bring together regulators, investors and innovation leaders from around the world to explore the future of RegTech.
The rise of RegTech in financial service has inspired the public sector to seek similar benefits. RegTech also demonstrates great potential to help governments improve transparency and accountability. For instance, big data and machine learning will provide governmental institutions the ability to identify potential emerging risks within the administration. Although the public sector recognizes the benefits of RegTech in improving regulatory and public perception, some challenges make the public sector hesitant to welcome the new technology. Problems for RegTech have arisen with regards to supervision, vendor management, data privacy, and security. These risks could occur for those who do not fully understand the relevant regulations in the place where they operate.
Given the significant benefits to regulatory and compliance capability, RegTech has a promising future market in the public sector. Regulators should consider adopting this technology to leverage existing compliance and regulatory systems in governance from a manual and time-consuming process to an automatic process in compliance programs. Some areas in which RegTech can contribute to the public sector are as follows: legislation analysis and regulatory reporting tools, surveillance and monitoring in public procurement compliance, financial sector and budgetary supervision tools, AML and other financial crimes tools, as well as the implementation of policies. Governments may wish to consider several aspects before applying RegTech in the public sector such as communication with public, human resources, and sufficient regulatory frameworks to stabilize development. Regulators also must continue to collaborate with RegTech practitioners to identify any potential benefits, insecurities or data privacy issues in RegTech.
