After a tough 2020, the world looked to 2021 with the optimism of a new beginning and hoped for respite from the Covid-19 pandemic. While the pandemic still looms large, businesses globally are learning how to operate in this new normal. With in-person interactions still a stretch for many, RegTech solutions are being given their time to shine.
If you are a RegTech going into the new year, there is much to be hopeful for. RegTech companies were found to have raised $13.5bn across 320 deals in the first nine months of this year, which were driven by large transactions over $100m – underlying clear and growing demand for RegTech solutions in the financial sector.
How does the industry itself believe the year has gone for RegTech? According to Muinmos CEO Remonda Kirketerp-Møller, RegTech has fared ‘extremely well’ during this year, for three key reasons.
“The first reason is market maturity. In 2021, we saw the maturing of the online trading platforms sector. You could even say that in 2021, online trading platforms changed their own risk profile from ‘moderately aggressive’ to ‘moderately conservative’ and this has had a huge impact on the RegTech sector, with a stronger focus on regulatory compliance than ever before.”
What are the main drivers behind this maturity? Kirketerp-Møller identified the cumulative effect of regulatory actions in recent years is starting to have a significant impact, while there is also now RegTech solutions that are making it possible to abide by the law without losing customers – and the industry has massively adopted them, Kirketerp-Møller claims.
She added, “As a result of the pandemic, a lot of money has been injected into trading platforms, and that, as it is to be expected, has made them more risk-averse, and incentivised them to heavily invest in compliance. For those who are risk-lovers, they have other, less regulated sectors like Crypto to transition to.”
The second key reason RegTech has experienced a boom this year in the eyes of Kirketerp-Møller is that the pandemic has brought upon the industry an abundance of clients in ‘wild peaks’ – and in order to deal with these surges, she claimed financial institutions realised they simply can’t rely solely on compliance officers and separate, unconnected solutions.
She commented, “Client after client painted the same picture to us – onboarding has become a logistical nightmare. They need a system that will consolidate all the different systems, stakeholders, documents and providers into one, workable, followable flow. And as clients come now, more than ever, in peaks, the system better be as automated as possible, allowing us to be able to enjoy the sudden rain of investors, as it falls.”
In an age where competition between financial institutions is fierce, the need for a highly efficient and strong customer experience offering is becoming a key deciding factor for many companies. Kirketerp-Møller describes this as the ‘customer experience arms race’, as clients become more and more demanding. She added, “Clients don’t want to wait and will therefore opt for the financial institution which has the smoothest CX. This has created an arms-race amongst financial institutions, to get the best RegTech solutions – and the industry standard is now incrementally higher than it was years before.”
A pandemic boost in disguise
One point that cannot be disputed is that the Covid-19 pandemic has changed the working models of companies potentially forever. Prior to the pandemic, while many financial institutions used digital platforms, there wasn’t the necessary level of uptake to be able to transition comfortably to a digital-first mentality if disaster struck. Disaster did strike, and financial institutions had to move to digitise fast.
With this pressure arises opportunity. CRO of Regnology Maciej Piechocki said, “Financial institutions are strongly pushing towards digitalisation due to the competitive pressure coming from the FinTech companies and the persistent cost pressure due to difficult economic framework conditions.
“We see a strong increase in demand for digitized processes with a high emphasis on cyber security and data protection. RegTech has become even more important in times of crisis: regulators need data from banks very quickly in order to be able to react. In connection with the Covid-19 pandemic, we launched a Covid-19 reporting solution at very short notice. Other examples include our new solutions to meet the new regulatory requirements for investment firms (IFD / IFR) and for derivatives reporting in Singapore.”
According to Piechocki, regulatory supervision has become highly industrialised and professionalised in recent years – with huge investments made in tech and personnel. As a result, he claims, the demands placed by supervisors on individual banks in their day-to-day business are also constantly increasing. Due to this, banks are increasingly willing to invest in innovative RegTech solutions to help them streamline their processes. In addition, Piechocki believes more than half of all European banks will outsource their reporting processes to external service providers within the next five years.
Any discussion about RegTech is not complete without compliance. As more and more companies were challenged with remaining compliant in the face of pandemic-related restrictions, the need for holistic, all-in-one solutions became greater.
Ben Parker – CEO and founder of eflow Global – believes holistic compliance has been one of the strongest points of emphasis in the RegTech world in 2021. He said, “The general concept of a holistic solution is to offer a range of compliance procedures in a single package, as opposed to going with individual vendors, each of whom offer a best-in-class solution for a particular compliance requirement. Arguments against this approach hinge on the idea of dead weight, of paying for unnecessary features, and even on the assumption that holistic vendors might boast an impressive range of features and solutions without providing the specificity and reliability of best-in-class vendors.”
Despite this, Parker stressed the appeal of a holistic solution is apparent – with compliance resources limited, not all regulated companies have the resources to allocate time to finding, onboarding and managing solutions from a range of vendors just to remain compliant.
The increase in popularity in the concept of holistic solutions has caused confusion in the industry, Parker claims. He believes it is posing key questions such as, ‘What exactly would need to be included in a solution for it to be considered truly ‘holistic’? ‘Does it include AML and KYC solutions as well as trade surveillance and eComms?’ ‘Is this an achievable goal, a present reality offered by some vendors, or just marketing jargon put out by vendors looking to get an edge over the competition?’.
In Parker’s opinion, these are two potential outcomes from these questions. The first would be an industry-wide effort to simplify the onboarding process for RegTech vendors due to the current difficulty surrounding onboarding RegTech vendors if you are a regulated firm. This can include understanding regulatory requirements, finding vendors who offer solutions to such requirements, onboarding the solutions and performing the work to integrate such solutions with your existing process. Naturally, the appeal for an all-in-one solution becomes apparent.
The eflow CEO believes a ‘sophisticated’ solution to this problem would be not to build holistic solutions, but to increase the support offered by regulators and independent research organisations to regulated companies in deciding on the correct solutions to ensure their compliance – essentially nullifying the drive for holistic solutions and providing a key barrier to adoption.
He continued by highlighting that the second and ‘far more likely’ outcome would be a shift away from purely holistic solutions and towards a focus on better integrations between vendors, “The concept of holistic compliance is obviously appealing, and in theory could work extremely well, but it is a simple fact that the ability of most vendors to create a truly compliant and truly holistic solution is hampered by their resources.”
To deal with this problem, Parker suggested promoting an increase in the number of vendor partnerships and cross-partner integrations to therefore offer the widespread compliance of a holistic solution without the downsides.
He concluded, “We are already beginning to see an increase in integrated partnerships, white label partnerships, and other such agreements between RegTech vendors, and we believe this trend will continue in 2022.”
A key watchword in 2021 for the RegTech industry has been maturation. With the industry starting to firmly come into its own aided by a global need by industry to move to a digital-first approach, many aspects of the sector are evolving.
Ronan Brennan – chief product officer at Compliance Solutions Strategies – believes an evolving area in RegTech is on the buy-side of the investment management industry. While the area has taken a little longer to mature than most expected, this past year has seen a great emergence of companies with scale and a breadth of offering to provide more opportunities for engagement.
He said, “A few years ago, RegTech on the buy-side was an industry that was seen by many as immature and proliferated by smaller, niche, single solution firms that carved out a “best-in-class” approach to a narrow problem set. In the last five years, the industry has witnessed the entrance of private equity firms as they seek to build RegTech offerings with scale, and a platform appeal addressing many inter-related problem spaces.
“Our industry is awake to the issues created by engaging multiple smaller boutiques and the duplicative integrations, operational inefficiencies, and balance sheet risks these bring to the table. The second round of private equity in-flow to the space is well and truly underway with the roll-ups of five years ago, being rolled up again in this second wave of investment – examples being the acquisition of CSS by Confluence Technologies.”
Brennan added the recognition that the strategic approach applies as far upstream as possible with an approach to centralisation normalisation and preparation of data for multiple re-use cases in compliance management and regulatory reporting use cases is in many cases driving the emergence of the scalable larger players.
What does the CSS CPO see in the RegTechs future? He believes these key trending topics will amplify and become stronger, “The focus on cybersecurity will only become more intense in 2022 as the industry unravels exposure to the Log4J zero-day exploit. Meanwhile, the continued presence of the pandemic in our daily lives has become the new normal and is forcing firms and regulators to address key supply chain and outsourcing oversight.
“Regulators are also taking a longer-term view on work-from-home and the oversight and risk mitigations it expects firms to deploy when their workforce is in large part remote from the core office locations. The mainstreaming of digital assets and cryptocurrency is not going away, and there is an emerging RegTech segment addressing the front-to-back-office value chain. We expect to see this solidify in 2022 as the regulatory community starts to draw crypto formally under their umbrella.”
In the opinion of Clausematch CEO and founder Evgeny Likhoded, the RegTech industry is currently at a tipping point. He said, “The demand for technology has grown rapidly over the course of the recent 20 months and I see this trend continuing into 2022.
“A whole new set of challenges for compliance teams has emerged, and this new environment is forming a natural landscape for automation, for propelling new collaboration methods where there is no more room for denying technology, no room for fear in front of the cloud and AI.”
Likhoded also voiced the opinion that now that RegTech is longer associated just with financial services, further penetration of solutions for compliance is going to be seen across a variety of regulated industries such as energy, education, pharma and healthcare.
He also believes institutional interest in crypto is continuing to heat up and believes the industry will see a lot more crypto regulations going forward – and expects the market will gain structure and obligatory status for all major markets in 2022.
The continuous rise of ESG
One area of RegTech which is indisputably a key trend right now is ESG. As companies look to prove their green credentials, the growth of ESG in RegTech appears to be unassailable.
On the topic of ESG, Brennan remarked, “While the EU leads the vanguard with its sustainable finance package encompassing SFDR, The EU (Green) Taxonomy and CSRD, we see the UK very close behind with SDR (Sustainability Disclosure Requirements) and adoption of TCFD (Task Force on Climate-related Financial Disclosures) in the pension space, while the regulatory program of Chair Gensler at the SEC is clearly focusing on ESG as a core topic.”
Likhoded commented, “Sustainability is another huge trend for next year. Technology as a leading catalyst in the sustainability transition is going to play a role here too. To enable the transition to net-zero, we will need to allow technologies to step in. In 2021, we saw the emergence of multiple customised ESG compliance solutions. We will see even more of these as new climate change regulations are going to be adopted in Europe and globally.”
Piechocki also added that Regnology is currently investing in the new ESG disclosure requirements, in-particular the European Banking Authority’s Green Assets Ratio, which is designed to help banks measure the proportion of their business that is climate friendly.
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