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March 30, 2017

Regtech, commonly known as regulatory technology is gaining greater focus in the risk and compliance industry due to implementation of stricter and more complex regulatory requirements such as the Standardized Approach to Credit Risk, the Fundamental Review of the Trading Book, and Interest Rate Risk in the Banking Book. Further, with the annual spending by financial institutions on compliance estimated to be in excess of US $70 billion, banks will continue to leverage upcoming technologies to manage their risk and compliance needs. Currently in its early adoption stages, regtech works well with regulations requiring complicated quantitative calculation. It can also manage large volumes of information and reporting.

The other key features of regtech solutions are:

  • Flexibility: Regtechs are flexible, and therefore can be scaled as per changing regulatory requirements.
  • Automation: Regtechs can help banks automate routine and mundane activities, which enables personnel to focus on value-adding activities like performing reviews and offering insights. Through automation, risk processes can be made more robust.
  • Cost-friendly: Complex calculation engines that are provided as utilities to banks come at lower costs, and can be implemented easily and quickly.

Regtech solutions are intended to simplify compliance tasks, and can work with the existing tech stack. They can help banks rejuvenate their existing legacy systems by introducing newer capabilities, thus enhancing data mining. This ensures reporting become flexible, timely, and cost-effective. This will further help banks improve profitability and efficiencies. Regtech solutions standardize compliance processes, as well as help in risk identification, analysis, and remediation. Banks can optimize compliance costs with the help of these solutions. The usage of advanced data analytics will also help improve the quality of insights, both for banks and regulators.

Regtech solutions can help service providers in various areas of the compliance lifecycle, including compliance interpretation, requirements gathering, development, implementation and testing, conduct risk adoption, modelling and forecasting, and final submissions and reporting. The solutions can present information gathered with the use of cognitive technologies and analytics in a more consumable format, enabling C-suite executives to make timely and prudent decisions. For instance, regtech solutions can interpret the effect of changing economic variables like the fall in GDP on business.

Regtech solutions can be used with regulations that involve complex calculations, have large information requirements, and need real-time monitoring. Regtechs like AQMEtrics (providing integrated risk and compliance solutions) and Trustev (preventing fraud) are few examples. There are a range of regtech solutions to address issues in areas such as machine learning, advanced analytics, standard data definition platforms, and APIfication. For example, compared to traditional in-house deployments in the risk reporting area, private cloud-based services could provide banks the required edge in terms of faster time-to-market, cost-effectiveness, and also offer capabilities such as analytics-as-a-service.

Is regtech the answer to all compliance-related areas?

Not currently, as the concept is still in its nascent stages, and needs to mature. Presently, organizations are using regtech solutions to attain operational efficiency, and ensure automation and faster compliance with regulatory obligations. However in the target state, regtech will evolve to become a one-stop solution, and help address all regulatory challenges. The focus of regtech solution will heavily tilt toward providing meaningful insights that aid management in decision making, risk identification, risk mitigation and risk management. For instance, banks currently spend considerable time close to 80% on report preparation activities, whereas the time spent on review is drastically less. While currently regtech solutions can help automate report generation, in the long term, these solutions can be used to gain a better understanding of the data reported.

Adopting regtech successfully

For banks, the immediate next steps are to identify relevant areas within the regulatory landscape that can benefit from regtech adoption. Banks should assess their state of readiness for regtech adoption and the ensuing impact. Further, in order to ensure enhanced adoption of the technology, banks will need to ensure effective collaboration between domain and technology groups. Knowledge sharing among regulators, and between regulators and FIs, especially while developing regtech solutions, will also help in its smooth adoption.

Ajay Katara is a Domain Consultant with the Risk Management practice in the Banking and Financial Services (BFS) unit at Tata Consultancy Services (TCS). He has over 11 years of experience in offering consulting services and implementing solutions, and has worked with several financial enterprises across geographies. Katara has significantly contributed to the conceptualization of strategic offerings in the risk management space in the areas of Basel II, Basel III, CCAR, LCR, and credit risk management. He has a Post-graduation Diploma in Management, specializing in Finance.


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