The municipal authority for London’s Square Mile has called for ‘urgent action’ to encourage greater use of RegTech – the use of technology by financial institutions to improve regulatory compliance – in a research report on the emerging sector.
The City of London Corporation says concerted action is required to tackle barriers to the growth and help achieve a ‘paradigm shift’ in how an industry described as being ‘at the cusp of maturity’ is viewed by the financial services sector.
The ‘2021: A Critical Year for RegTech’ report says that RegTech has an awareness problem, which extends to fundamentals including the definition of RegTech itself.
The sector has, it says, significant potential to add value not only to financial services, but to the wider UK economy, but barriers to adoption include ‘lack of understanding’ between key actors: policymakers and regulators; RegTech suppliers; and financial institutions such as banks.
The projected annual cost of financial crime compliance is about £35.8bn ($49.5bn) in the UK, according to data cited in the report, which goes on to say that greater RegTech use could save Britain’s biggest five banks at least 0.05% of total compliance costs, a combined annual saving of £523m (about $724m) for these five banks alone.
Recommendations to regulators
The 78-page analysis offers 12 recommendations aimed at helping the RegTech sector to grow.
Three of the recommendations are aimed specifically at regulators. These are, firstly, for regulators to adopt a ‘tech embracing’ stance to advocate for improved standards for technology driving regulatory compliance in firms.
Secondly, for regulators to provide an ‘unambiguous view of what “best compliance technology” looks like’ and reject certain ‘legacy’ compliance approaches, for example spreadsheet and email-based compliance.
Thirdly, for regulators to accelerate work to establish standardsin data and regulatory rules to move towards a digitally-enabled regulatory framework.
The report was produced by the City of London Corporation in partnership with RegTech Associates, a London-based research company. It was launched at a webinar on 16 April that featured a panel including representatives of two UK regulators: the Prudential Regulation Authority and Financial Conduct Authority.
There are currently 230 RegTech UK-headquartered companies, according to the research, which estimates that about 68,000 people are employed in RegTech in the UK.
City of London Corporation’s policy chair, Catherine McGuinness, called on the government to capitalise on momentum created by the recently published HM Treasury-commissioned Fintech Strategic Review and build on the recommendations in the RegTech report to enable the sector to “reach its full potential”.
RegTech’s growing global prominence
RegTech’s emerging importance at a global level was highlighted at the start of the year when it was chosen alongside its sister discipline ‘SupTech’ (the use of innovative technology by supervisory agencies) as one of six priorities in the Bank for International Settlements’ (BIS) Innovation Hub’s 2021-2022 work programme.
Also, the Financial Stability Board (FSB) published a report in October last year entitled ‘The Use of Supervisory and Regulatory Technology by Authorities and Regulated Institutions’. Technology and innovation are ‘transforming’ the global financial landscape, presenting opportunities, risks and challenges for regulated institutions and authorities, the 76-page publication said.
Opportunities offered by RegTech and SupTech have been created by the substantial increase in availability and granularity of data, and new infrastructure such as cloud computing and application programming interfaces (APIs), the FSB’s publication noted. For authorities and regulated institutions, the efficiency and effectiveness gains, and possible improvement in quality arising from automation of previously manual processes, is a ‘significant’ consideration, it said.
Asia-Pacific regulators ‘particularly active’
The City of London Corporation’s report is UK focused but includes international elements, with representatives from regulatory bodies in Australia, Canada, Singapore and the US having interviewed by researchers.
While the UK is ‘ahead of the curve’ in its support for RegTech, global regulatory bodies and regulators in other parts of the world are ‘recognising the potential’ that RegTech has for enhancing compliance in their regions, the report notes. It cites regulators in Asia-Pacific as having been ‘particularly active’ in their support for RegTech.
Dr Sian Lewin, who led the RegTech Associates research team, told Global Government Fintech: “While both the PRA and the FCA in the UK have been pioneers in exploring the art of the possible in RegTech, the UK can also learn from some of the innovative practices overseas regulators have employed in their encouragement of adoption.”
“The Monetary Authority of Singapore holds annual awards for innovative RegTech solutions and has established grants to fund the implementation of RegTech in smaller financial services firms,” Lewin continued. “Elsewhere, many regulators are leading by example, adopting RegTech for their own activities such as the Australian Prudential Regulation Authority (APRA)’s use of RegTech to streamline its own data collection and regulatory reporting processes.”
The report was informed by data supplied by 125 RegTech companies, as well as roundtables and qualitative interviews.
‘Lithuania eyes RegTech potential as fintech sector grows’ – Global Government Fintech’s news story from February on Lithuania’s central bank eyeing the potential of what it described as a ‘revolutionary’ new RegTech tool after undertaking trials focused on monitoring for anti-money laundering (AML) compliance
‘ECB eyes ‘cutting-edge’ tech as it launches first SupTech procurement’ – Global Government Fintech revealed in January that the Frankfurt-based European Central Bank (ECB) had launched its first ‘SupTech’-specific procurement with a planned spend of more than £200m
‘Hong Kong unveils two-year RegTech roadmap’ – Global Government Fintech’s news story from November 2020 on the Hong Kong Monetary Authority ramping up its support for RegTech having published a two-year roadmap to drive adoption in banks