With the pandemic leading to a great migration online for many who previously wouldn’t have considered it, an opportunity has provided itself to RegTech companies in key markets to make the most of the new normal.
Two key geographical markets where RegTech has flourished has been in the US and EMEA regions. Research by Markets&Markets found that North America was estimated to have the largest RegTech market size in 2021, with that position only expected to strengthen in the years to come.
According to Chad Schaefer – head of professional services at Clausematch – legislative developments in the US have helped make the market a stable hub for RegTech. He said, “The Department of Justice’s latest updates affected various aspects of compliance but they share a common theme: moving forward, regulators expect greater accountability and absolute proof that firms’ compliance programs are intentional and effective. This factor undoubtedly has made the US market mature for compliance technology.”
In terms of adoption, Emma Kempton – who serves as VP, Account Management at Clausematch – the demand has been increasing notably throughout the last five years. She continued, “In 2016, not a single bank had a cloud strategy, everyone wanted to manage compliance on-premises. Now, the situation has changed. We have multiple clients who have mandated that all policies must be on Clausematch. The project teams that have bought into the solution are tech-focused, they are attracted by innovative technology, very willing to adopt new tools, and are really keen to get things moving. Cloud technologies now feel absolutely normal.”
Kempton remarked that when such projects get going, many companies find core technology features of the platform are of more importance than the newest ones. She said, “That is the approach the EMEA customers have, which is more fundamental once the project is in implementation than at the beginning. Focusing on the core features, having an audit trail, or using technology to help them to pass audits is very common.” The newest breakthrough features, Kempton added, do not hold the same level of importance but are still of much interest. It is also key for these companies that the technology they are using is user-friendly and intuitive, so that it is easy for staff to understand what they need to do to interact with said technology to reach their business objectives for the project.
“The US market continues to mature,” stated Schaefer. He added that the US RegTech market focuses on efficiency and accuracy, two things that are enforced with RegTech solutions, “The level of accuracy has increased and is driven by the continued oversight on operational efficiencies with Policy Management. The continued focus is standardising the methodology and bridging gaps in siloed data. The result is streamlining user interaction to the regulatory documentation.”
While both the US and EMEA offered similar product themes, the way these products are offered to the customer in both markets can be considerably different. How do the two markets differ?
According to David Griffiths – Eventus director of regulatory affairs – a key differentiator comes in how the solutions are offered. He said, “There is broader adoption of consolidated RegTech in Europe because vendor solutions in Europe tend to be more generic and offer more bundled services. US RegTech vendors on the other hand offer very specific services and the regulatory landscape is such that vendors can do quite well focused on those single services.”
Griffiths gave an example of vendors in the US who handle reporting for the Consolidated Audit Trail and others who handle SEC Rule 606 – however, not many vendors will handle both, he claims. An even smaller amount will handle regulatory reporting and trade surveillance, therefore, Griffiths stressed, European customers tend to buy more packaged products such as reporting solutions, while US customers can buy multiple products from multiple vendors.
He added, “US clients tend to be more selective compared with their European counterparts, because of the very specific and detailed requirements by US regulators. Because European customers are often operating in multiple countries under multiple jurisdictions, they are dealing with a number of regulations and need to be more universal, and so their expectations reflect that.”
In terms of which market is stronger – Griffiths believes that it is not a matter of which market is stronger but rather the client approach to RegTech providers. He claimed that the speed of regulatory change that exists in Europe means FinTech providers have to stay on their toes to remain current.
He detailed, “The European RegTech market has a customer base with a high level of expertise, which means vendors have to produce extremely capable platforms to meet their expectations. Clients in the US, meanwhile, are regularly challenged by requirements issued by the SEC or FINRA.
Griffiths concluded, “The larger differences in level of RegTech adoption is more likely to be determined by the user persona rather than the region where the user is located. Whether or not a player is a tech-savvy hedge fund vs. a small three-person firm will speak to the level of adoption more than if that firm is in the US or Europe.
Who holds the edge?
In the competition to establish themselves as leaders in their field, both the US and EMEA markets are fighting to hold the edge over the other. According to PassFort head Alex Richter, the US was undoubtedly the forerunner regarding RegTech investment, innovation and adoption.
Despite this, the market is showing signs of change. Richter said, “After a combination of unfavourable regulatory environments and lack of profitability, the US market has dipped in recent years as the European market has been growing. European laws are generally favourable for creating a positive FinTech and RegTech environment, allowing European RegTech to gain the edge over the US.”
He continued, “The UK makes up a large part of European RegTech activity. While the implications of Brexit and the covid pandemic are still unfolding, there is an opportunity for the US developers to exploit the opportunity to their advantage.
“However, with the heavy and complicated regulatory framework facing US businesses, which are still heavily scrutinised after the 2008 global economic crisis, I would still imagine the EMEA region holding the edge over their US counterparts.”
While the RegTech market is continuing to diversify its offering and expand its horizons, there is growing signs that there is convergence in the industry. Theta Lake general counsel and VP Marc Gilman remarked, “Regulatory expectations in the US and EMEA have converged in light of the ongoing pandemic and resulted in a unified opinion that, despite early reprieves on certain issues, firms must manage compliance in the hybrid workplace consistently. This regulatory synchronicity has triggered a corresponding strategic alignment for RegTechs providing services to US and EU customers alike.”
Gilman gave the example of both the CFTC and FCA who initially relaxed voice recording compliance requirements under Dodd-Frank and MiFID II during the earlier days of the pandemic due to the challenges of deploying telephony infrastructure and support tech systems, new tools for recording and oversight have sufficient matured, which has led to the expiration of regulatory leniency.
He continued, “From an adoption perspective, financial services firms in the US and EU are scrutinizing the legacy compliance technologies used for communications oversight and other obligations. RegTechs are taking a modern approach to designing and deploying solutions that leverage API-based platform integrations to ingest voice, voice, and chat data, using AI to identify risk, and customizable workflows to support complex, globally dispersed risk and compliance review teams.
“RegTechs deploying this contemporary approach to compliance are seeing a rapid uptick in adoption and a growing, enthusiastic customer base clamouring for more effective and efficient supervisory tools. Geographic boundaries are less relevant in today’s hybrid work environment, fueling a RegTech ecosystem favouring startups reconceptualizing the stale, engrained approaches to compliance and supervision built for the email-centric heyday of the early-2000s.”
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