By: Conor Coughlan, global head of risk, regulatory and compliance marketing, Financial and Risk Division, Thomson Reuters
Looking forward and following current patterns of industry change and analysis, 2018 is going to be a pivotal year for regtech collaboration, service and solutions providers.
In essence, the themes we can expect to see more of in 2018 are:
- Continuing expansion and scale of current offerings
- Greater innovation and collaboration between market players
- Maturity and increased investment (backing) for regtech firms
- Start of an acquisition and commercial partnership movement
More broadly the niche perception of regtech relating solely to firms addressing small scale, singular regulatory or compliance workflow only challenges is over. Regtech is now seen to encapsulate all forms of solutions origination, innovation, development and deployment for specific or large-scale risk, regulatory or compliance challenges.
In addition to smaller players, more mature market vendors such as Thomson Reuters, Bloomberg, Six Financial, Accenture and ICE have now aligned elements of their businesses to focus on dealing with regtech. In addition, hundreds of new players are entering the market every year. This quasi ‘ICT, governance, risk and compliance (GRC) and reporting’ solutions and services arena is, to put it bluntly, booming. Given the ever-increasing regulatory demands facing the banking, financial services and insurance (BFSI) sector, and now with General Data Protection Regulation (GDPR), that is not surprising.
Industry participants are looking to large scale players and proven entrants to collaborate more effectively and deliver a broader and deeper range of solutions and services, that can, in the future, offer end-to-end compliance, governance, risk management and reporting oversight and capabilities.
In particular, due to the current and future level of regulatory oversight, the BFSI sector, although not exclusively, is looking to regtech players to address how they can be both compliant with GPDR, MiFIDII, FRTB, PSD2, PRIIPS (+ so many more) and deal in some cases with contradictory (data usage restrictions) requirements and/or complimentary obligations relating to data collation, analysis, transparency and reporting requirements, which may offer more synergistic benefits, if successfully addressed.
Collaboration and partnership
In 2018, it is evident that collaboration, partnership and more formally ‘joint ventures’ will continue to increase, as the BFSI sector endeavors to address a swathe of regulatory pressures and better align the ‘right firms, with the right players’ in order to drive scale. Evidence clearly exists whereby large-scale market vendors (in part due to direct customer requests) have been working with more specialist regtech firms to address specific challenges. This has aided such longer-term players to pivot some of their related business offerings and bring their considerable experience and best practices to bear. In many cases, such players are offering regtech firms access to their Innovation Labs and Incubation Centres.
Equally, many previously perceived niche players are now ripe for acquisition, as they have proven the validity of their business models and a clear demand for their services, not to dismiss that many are also highly lucrative. Not all will follow this path in 2018, but many are now coming of age. This year, we can expect to see larger market vendors purchasing a range of proven regtech firms. In addition, we will see some venture capitalists (VC) and private equity (PE) players starting to curate a portfolio of aligned or complimentary firms, in order to shape and develop a new regtech leader or to align some clear and obvious capabilities into one group or alliance of such firms.
Equally, many conceptual and unproven regtech start-ups will fall by the wayside, but for example, firms like www.enforcd.com, which have won the backing of the Bank of England and Accenture, are likely to take their offerings and scale them even further.
Overall, 2018 is going to be a very exciting and evolving period for regtech. We should see the landscape starting to consolidate and the possible emergence of some new leaders.
What are the greatest obstacles for regtech?
For me, the answer to what the greatest obstacles are for regtech and innovation in general are is very clear. To put it simply:
- Public and private investment
- Government and competent authority policy
Without investment, direct or indirect, our ability to innovate is being greatly stunted. We have some clear examples around the world, such as Singapore and Hong Kong, where this is not the case. However, when I look to the UK for examples, its level of public investment is appalling when compared to other jurisdictions. Governments and devolved regions, in addition to private entities, must actively invest in innovation and in this case regtech players. Innovation is not free, it does not happen generally by accident or more precisely without a mandate for innovation and experimentation already being in place. If you want to see rapid change, you must strategically invest to get it.
Government, including development agencies, and regulatory authority strategies and policies, must be aligned to stimulate and foster greater regtech innovation. Innovation requires strategic forward-looking policies and investment positions. If you want to win the ‘Regtech Race’ then you best make it a strategic objective and form a coherent policy and framework around it. Merely offering sandbox access is not the same as strategically stating you want to be a hub for regtech innovation. Having clear public strategies and policies in place is vital to innovation, experimentation and development.
Culture, both internally and externally, both corporate and public, needs to be aligned to fostering innovation. In particular, corporations and private entities need to open their minds to want to innovate and seek new solutions and methods to address regulatory and compliance challenges. If you want to be more agile, responsive and capable, you can’t keep operating the way you have always done in the past. Equally, if public organisations are seeking greater innovation, change and solutions to better address known or unknown risk, regulatory or compliance challenges, then you need to adopt a fostering culture of curiosity, openness and innovation.
Without one or more of the above being in place, our ability to further develop and expand the regtech arena is greatly reduced. We will not see the transformational changes we want in the near future.
Regtech technologies with the biggest impact
Blockchain: Distributed ledgers, including blockchain, bitcoin, Ethereum platforms and so on, are already generating new use cases and it’s clear their capabilities will lend themselves to the regtech arena. One such area is how firms address Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements and obligations.
It’s very possible that the crypto-currency bubble will in fact power a new regtech eco-system(s) that will offer far reaching benefits and innovation capabilities, long after initial currency / transaction concepts have disappeared. Any possible low cost, ideally low energy usage, multi-hosted, shared, standardised digital / software platform that can offer increased transparency, tracking, auditing and reporting capabilities will have many benefits for the regtech community, providing the platforms are secure, stable and scalable. So yes, these platforms will better enable the development of a new range of regtech solutions and services.
Smart Data: The era of Big Data is over. It’s now the era for ‘Smart Data’ or, to be more precise, knowing what do with your data and how it can offer your firm and customers value adding returns. Collating datasets for the sake of it does not offer your firm or the market any true advantage unless someone can derive value from it.
Assuming you have processed, normalised, standardised and aggregated all your content/data (big task), you are now in a position to critically examine and possibly correlate a range of value adding data sets, or establish previously unknown correlations or indirect/direct patterns.
Unless you have specifically selected to focus on a range of data points (better for smaller firms, as it lowers data processing costs), you are now facing a huge headache when it comes to storing and processing large volumes of company and market data.
Ultimately, data analysis, smart data and our ability to make sense of large amounts of fixed or real-time data comes down to our ability to deploy machine learning and artificial intelligence (AI).
Machine Learning and Artificial Intelligence: Machine learning, or defined pattern recognition and processing, is more established and proven. However, it does tend to be far more rigid and process specific. It has been in use for decades and offers many of the world’s leading firms a competitive advantage when it comes to processing large swathes of complex data.
AI is still unproven, limited forms have been deployed to address very standardised workflows. However, the vision of the all-knowing, highly intuitive, exceptionally intelligent computer mind/assistant to help you process vast amounts of complex and varying data has not yet arrived.
Value-adding versions of lesser AI powered systems, processes and platforms are coming online. AI solutions and services will help firms and their customers to better identify risk, regulatory and compliance patterns and challenges.
In particular, with regards to regtech, AI, or versions thereof, could help firms to better analyse trading patterns, money movements, engagements by suppliers and partners, procurement practices, internal employee actions (or non-actions) in addition to customer usage patterns, which could in practice help firms better predict / determine how they can offer more tailored value adding services in addition to meeting their own regulatory and compliance requirements.
One example of successful AI development is Thomson Reuters Data Privacy Advisor (TR DPA), which has been developed with embedded AI capabilities to better enable firms to meet their global data privacy obligations. This service launches formally in 2018 and has been designed for related legal, risk and compliance professionals. In this case, it is dealing with a highly complex and ever-changing set of multi-jurisdictional challenges. However, you will need to wait for the formal launch to see what else the solution does.