RegTech is a compound word derived from “regulation” and “technology,” and generally refers to technology to respond to financial regulations. As financial regulations to avoid risk have been strengthened since the Lehman Shock in 2008, the scope of regulations is expanding and becoming more complex, and to cope with this situation RegTech is attracting attention as a means to reduce costs and effectively respond to regulations.
RegTech Background
RegTech is a technology to quickly and accurately apply changes to applicable regulations and the compliance processes needed to manage and navigate the complex regulatory environment. By leveraging information and communications technologies (ICT) − such as information technology (IT) and big data analytics, artificial intelligence (AI), and biometric authentication − to strengthen regulatory and compliance processes through RegTech, RegTech shows how to reduce regulatory-related risks, costs, complexity, and compliance time.
At the business level, RegTech can help address regulatory requirements and automate them to make operations easier, more efficient, and more profitable, while at the government level, it helps reduce compliance costs, increase the efficiency of regulatory processes, and improve the regulatory environment.
Although RegTech can be used in other industries, such as healthcare, AI, and big data, it is commonly used by financial companies for regulatory compliance, transaction monitoring, reporting, case management, and compliance.
RegTech Classification
RegTech is classified into CompTech, a regulatory response system, and SupTech, a financial supervisory work system, depending on what it is applied to, but RegTech is also sometimes considered to be limited to CompTech.
In this article, we looked at the regulatory compliance and risk management aspects of RegTech, focusing on CompTech.
Regulatory Compliance Aspects
Regulatory compliance and change management: The biggest challenge for regulated industries is the compliance burden. Financial institutions must keep up to date with the applicable regulations for their area. Companies not only have to comply with the management regulations of various agencies and respond to frequent changes in regulations, but also have to comply with the reaction time to change operations. However, this complex process creates compliance costs, revenue loss, and the risk of fines. Compliance management is the process of identifying and addressing regulations, standards, and requirements to comply with these rules.
Regulatory reporting and case management: Reporting and case management to comply with regulations is also one of the key tasks of financial institutions. According to Kroll's research, in 2020, 33% of U.S. banks spent more than 5% of their annual budget on compliance. Improving data quality with RegTech's case management can reduce overall operating costs, and more information than ever before can be displayed in a variety of formats, allowing users to be defined and presented in a variety of formats according to the format requested.
Sharing regulatory information: It is also a domain of RegTech to share changed regulatory information with stakeholders in the related area. It stores regulatory information and creates a central repository accessible to all users so that it can be shared among stakeholders involved in the area.
Risk Management Aspect
Currently, the most common example of RegTech is the electronic customer verification (eKYC) process, in which banks digitally verify the identity of people who open new accounts. With the conversion of eKYC incorporating RegTech technology, the time and manpower required for manual procedures have been drastically reduced.
Identification and management: Digital identity verification with rules-based RegTech can reduce identity theft by comparing in real time an ID image to a verified government-issued document such as a passport or driver's license. In addition, KYC (know your customer) rules can be applied to the data set, including name, address, date of birth, and other relevant personal information, to verify that the person in the ID is actually doing the transaction.
Transaction monitoring: Transaction monitoring is the process of tracking the movement of transactions and the use of funds, which can help identify money laundering, detect tax evasion, and prevent other illicit activities. In addition, network analysis can be used to look at the relationship between traders in a transaction, monitor the risk of abnormal trading in real time, and respond immediately.
Risk analysis and management: Scenarios can be analyzed based on past activity, behavior, and warning signs to predict events, including fraud. Additionally, for specific high-threat cases, the same level of vigilance can be continuously enforced without additional resources or manual case management.
Anti-money laundering (AML) compliance and detection: AML regulations require financial institutions to log any suspicious activity and have their internal compliance expert system investigate potential money laundering. Anti-money laundering is an area that requires thorough management, as simply failing to report suspicious transactions or failing to conduct a thorough investigation of the circumstances can constitute a violation and result in fines.
In addition, it can be used in various fields such as consumer protection and cryptocurrency regulation.
RegTech is an area with high difficulty in starting a service, such as understanding various legal systems and regulations, as well as negotiating with regulatory authorities. It is said that global companies are systematically responding to regulations and negotiating with the government through personnel with the title of “chief compliance officer (CCO).” RegTech is expected to not only respond to current regulations with technology but also grow into an infrastructure service suitable for the complexity of regulations due to changes in the industrial structure of digitalization from a mid- to long-term perspective.
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