Regtech in the EU — the path forward to better compliance

Regulatory technology (regtech) seeks to provide “nimble, configurable, easy to integrate, reliable, secure and cost-effective” regulatory solutions. In the EU, the European Banking Authority (EBA) has the authority to help drive innovative regtech services and regulatory alignment. They have created a report, EBA Analysis of Regtech in the EU Financial Sector, to provide insight into the current regtech landscape and its benefits and challenges.

Regtech is now mainstream

While use varies by jurisdiction and by use case, many financial institutions (FIs) have adopted at least some regtech solutions. Anti-Money Laundering (AML) has been the most popular use case, with 75% of FIs reporting experience of using the technology. Other significant use cases include ICT security‐related, adopted by 50% of the FIs, and fraud prevention, used by 40% of the respondents.

It’s no surprise that most regtech providers are new, as the term itself was coined in 2015. The results are that 39% of regtech providers are smaller companies and have less than six FI clients. Establishing credibility with FIs is a significant hurdle. Larger regtech companies from outside the EU seem to have more traction; the survey found that non‐EEA‐based have 2.3 times more customers than the average EEA‐based provider. These non-European companies also seem to be farther along in their corporate development, with 40% already in advanced rounds of venture financing.

When it comes to actual implementation, 60% of AML, fraud prevention and ICT projects are already in production. While some regtech technologies might still be speculative, their use is well developed in many jurisdictions across the EU. Most FIs will continue to spend the same amount or slightly increase budgets for regtech.

The reason for regtech

Interestingly, the benefits the FIs see and what the industry believes don’t sync up. The most significant use, from the FI side, is the ability to improve risk management. But from the provider side, they see improvements in efficiency as the main advantage. 

It seems both regtech providers and FIs need to understand better how regtech can best fit into the FIs compliance stack to improve results. Solutions that help compliance professionals better use their time provide a sweet spot that might satisfy all parties.

Both sides agree that greater accuracy, speed and data optimization is a decisive advantage.

Barriers to regtech success

The most significant barriers to ongoing regtech success with FIs are around the use of data, which makes sense, considering all the news around data hacks and ever-tightening privacy requirements. There are cybersecurity factors, as well as how best to handle data across legacy systems.

Other regulatory requirements need consideration as the legal landscape continues to change. It’s difficult to determine a future-proof technology when future requirements are still to be determined. The ongoing shift in the specifications raises the cost, increases the need for education and training and adds to an environment where the FIs often consider regtech solutions immature.

From the regtech point of view, the FIs tech stacks can lack standardization and integration abilities. Trying to implement their modern API solutions on legacy platforms can lead to slow roll-outs and performance hits. Without a holistic view of regtech, a point solution doesn’t enable all the technology’s opportunities.

Many regtech companies are disadvantaged due to their smaller size. They can’t offer a breadth of solutions. They are more susceptible to changes in regulations or the marketplace. They don’t have bargaining power when it comes to dealing with large FIs. And they have competitive pressures from numerous other regtechs, all fighting to establish themselves.

Path to regtech success

It’s important to note that the biggest barriers to success are internal factors of the organization. As the EBA analysis states,

“As the majority of identified challenges that hold back the regtech market development are linked to internal factors of FIs and regtech providers, it would be primarily for these companies to take further actions to address the challenges.”

There are concrete steps that can assist regtech in the eyes of regulators:

• Improve awareness and education of regulators and supervisors to understand the capabilities and opportunities of regtech better
• Look for ways to harmonize laws and regulations across the EU to simplify and speed adoption 
• Foster collaboration with industry and regulators by using regulatory sandboxes and other forums to demonstrate usefulness and compliance

The analysis also points to having a central database of providers or having a certification program to help build trust in regtech solutions.

Many technologies hold great promise to reduce risk and fraud and provide better compliance. Ensuring these technologies can succeed will offer robust benefits to the industry, FIs and regulators alike. Working together, understanding and overcoming the potential problems is an initiative that can appeal to all EU compliance professionals.