RegTechs are a new form of technological answer to the new regulatory requirements that are increasingly growing and becoming highly expensive to cover.
RegTechs’ development faces various obstacles that must be overcome. Please keep in mind that the challenges listed below apply to the banking sector but also to any other sectors that are regulated.
TL;DR : http://techfoliance.com/fintech-corner/insights/the-5-regtech-challenges-for-the-banking-sector-and-how-to-overcome-them/
Taleo Reporting is a RegTech company, which have shared its practical views on the development of RegTechs in the present paper.
1. The obstacles to the adoption of regulations
At least five challenges represent major obstacles for adoption of regulations by the actors and RegTechs, described in short hereafter:
Challenge 1: follow-up and hierarchy of regulations
The first challenge concerns the monitoring and the hierarchy of regulations. Regulations are diverse, complex and multidisciplinary. Certain regulations apply only to national needs such as the rules of taxes, rules and standards of Reporting. Others cater to segmented professionals and apply to a dedicated area such as AIFMD. Others apply to actors such as PRIIPS.
Establishing a hierarchy of regulations is already in itself a complex work for players and RegTechs and a crucial element concerns synergies between regulations. This element is difficult to predict because of the temporality of the implementation of regulations (FATCA and then CRS) and the geographical focus shifts of the players themselves (Europe then Asia and USA).
Challenge 2: lack of a common position of the regulators
The second challenge is the lack of a clear position of the regulators on the right solutions and standards to be applied. This lack leads to create uncertainty. This is discouraging not only for RegTechs and large corporates but also for regulators themselves because they cannot properly fulfill their missions. It should be noted that the regulations that emerged since 2008 are multidisciplinary and regulators are still organized by industry segments which greatly complicates the adoption of common standards.
Challenge 3: data protection and technology adoption
The third challenge concerns the adoption of common standards for the protection of customer data. Of course there are rules of data protection in different countries, but these rules are valid only in their spaces, which lead to conflicts because regulations are emerging at cross borders levels.
In the same time, technology is evolving globally and its adoption is at least by geographical area. The question that arises for the RegTechs is what technology should they adopt knowing that the developments of RegTechs’ solutions are expensive, complex and risky. Should the Regtechs use big data and if so in what legal framework and under what conditions? Do they use cloud computing and if so, under what conditions?
Challenge 4: technological change
The fourth challenge is the technological change because the standards used in the past become obsolete. The introduction of XML and XBRL becomes the norm. These changes represent challenges for the RegTechs because players do not want to deviate from their legacy systems because the investments are significant.
Challenge 5: costs of development and implementation of regulations
The fifth challenge is twofold: on the one hand, the development costs of technology solutions are high and need to be carefully considered and on the other hand, the choice of the approach for the implementation by each player is very problematic, especially with disagreements on the regulations’ interpretations. For example, the proposed rules for PRIIPS and their application for life insurance products is a very instructive example on uncertainties that may exist.
2. Proposals in the areas of RegTechs
Local or international RegTechs
Firstly, a RegTech must fit into an ecosystem including regulators, stakeholders, operationals, legal advisors etc. Therefore, all RegTechs would start locally, but sooner or later, will be called to provide solutions internationally.
For example, the regulatory Reporting could be considered a local RegTech field because reports are to communicate to the local authorities. However, some types of these Reports become quickly international as shown in the CRS Reporting.
By industry or global RegTechs
The regulations are more comprehensive and specificities by industry are covered in the same laws. This approach is the bearer of simplification and its implementation is less costly.
However, the RegTechs are forced to take risks on the interpretation of the regulations in order to develop the first versions of the algorithms of target regulation. The complexity of adaptation of these versions by the players (banking, insurance, asset management) is function of the inaccuracies that could exist in the regulatory texts and the lack of common standards.
RegTechs as a public service or private model
For economic efficiency and more security, the RegTechs could be considered as public service providers with the obligation to serve all stakeholders wishing to reduce their costs of compliance, to avoid duplicate efforts and to secure regulatory interpretations. However, Private RegTechs will certainly exist to meet the standards across groups’ entities and to cover the regulations of the other jurisdictions.
RegTechs as a vector of change for business models
Finally, the adoption of the RegTech approach could become a tool to change the business model of many players because regulations introduce necessarily impacts on marketing, customer management, legal risk, technology, etc. In addition, the RegTechs adoptions will necessarily optimize recurring costs.
RegTechs business model
A RegTech has to choose its business model by answering to the following critical question: should RegTechs be specialized by industry or geography?
The answer is not easy because RegTechs must provide valid and innovative solutions covering major changes that any industry faces. An Insurance RegTech will not necessary have the same focus as a Banking RegTech or an Asset Management RegTech.
Of course, interactions across these three major industries exist because they will deal with common products and serve common clients. Plus, sizes of the players in each industry will impact the development of RegTechs business models.
In all cases, every RegTech must:
- Make sure that the offer is in line with the common standards
- Ensure that its offer corresponds exactly to the recommendations of the National Authorities.
- Adopt a technology that fits the investors protection standards.
To cover these requirements, RegTechs must fit into working groups including researchers and experts in the three industries to optimize its resources and balance its workload to implement various regulations.
Content was written in partnership with Abder EL ADRAOUI — Head of R&D at Taleo Reporting, a high-value Regulatory FinTech
