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Mind the Gap: Why RegTech Hasn’t Hit the Target (Yet)

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By Bernadine Reese, managing director, and Jagdeep Sihan, associate director, at Protiviti UK.

RegTech is a new and innovative industry. As the cost of compliance increases, and attention from regulators mounts, financial firms are looking for ways to make their processes slicker and prove that they work effectively. Technology can be part of the answer.

Tools can be used to monitor online payments, detect fraudulent activity and protect against money laundering. Cyber threats can also be understood and acted on to prevent the widespread loss of data and funds.

RegTech can therefore help meet the regulators’ expectations while saving time and money and helping protect customers. Businesses are also more likely to keep their operations up and running as a result.

At the same time, financial firms are more open to new technology than they were five or ten years ago. They are keen to move away from cumbersome manual processes and to discover compliance issues in real time. The enthusiasm for progress is stronger than it’s ever been.

This is good news for companies that supply technology. If the RegTech headlines are anything to go by, then the sector is well placed to help financial services firms meet their compliance obligations in the future.

Why is there a gap?

But there is still a gap between what some technology companies provide and how that is understood and used by large financial firms. Fast-moving startups with RegTech solutions are very different in style from large firms with thousands of processes, legacy platforms and a historical aversion to third-party risk.

On one side, the boards of financial services firms are still baffled by IT speak, even if it might be related to a very useful solution. On the other side, RegTech businesses don’t always appreciate the complexity of life at a high street bank.

This isn’t a new cultural challenge, but it’s one we encourage people to think about. Because if RegTech is better understood, it’s more likely to be more successful.

We’ve spoken to banks who say: “We like the software, but we’re struggling to work with ‘company x’ because they don’t speak our language.” They need help to take what they are being offered and map it onto their systems. Insurance companies are in the same position. While they have been slower to embrace technology, there is still an issue at senior level with the language around technology.

So, what can be done?

The current climate offers opportunities for RegTech companies and financial firms that are willing to work together. Operating under Covid restrictions has helped everyone see the need for agile and adaptable services in a technology-driven future.

But everyone needs some education and maturity to ensure these obstacles can be overcome, or at least acknowledged. And we think the solution lies somewhere in the middle.

We have seen specific IT risk committees being set up in financial firms to look more deeply at these issues. That places people with hands-on experience and deep insight in decision-making positions, which can be a good thing.

In some cases, financial firms also engage with RegTech companies as a way of articulating the underlying problem to internal stakeholders: Is it an issue with legacy systems or related to users understanding how to access data in real time, for example? This type of communication helps bridge gaps in understanding and brings people together.

At Protiviti, we have also started to work on bridging the gap. These conversations, which have explored the use of process mining technology, have helped us understand what RegTech and financial firms are trying to achieve. Both sides are engaged with the process. We’ve noticed that people are willing to talk, learn and look for solutions.

In the future, as the industry grows, it will be important for those developing the technology and the financial institutions embracing it to understand more about each other. That insight and shared knowledge will help the RegTech industry grow. It will also reduce the headaches associated with compliance and help financial institutions evolve.

We see a world in which next-generation compliance departments will embrace this technology, and the skills needed to run them will evolve and change. Collaboration between third-party providers and financial firms will be much deeper, and in some cases bespoke platforms will be developed as a result.

Progress towards this vision is definitely happening, but there is work for everyone to do.

What does the RegTech industry need to do?
–        Engage with firms early when they are trying to articulate the issues.
–        Collaborate with the financial industry to develop more user-friendly language with less technological jargon.
–        Be prepared to adapt its approach and style depending on the composition of the buying team.
–        Be prepared to adapt, revisit and amend solutions to provide a bespoke service to companies.
–        Be prepared to become an adviser for in-house solutions.
What do financial firms need to do?
–        Collaborate with RegTech providers early so that solutions can be developed together.
–        Push for clarity and simpler engagement.
–        Be agile and open to discussing the need for innovative solutions.
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