Trends powering RegTech Adoption

By Ajay Katara, a Domain Consultant in Banking Risk Management area at Tata Consultancy Services (TCS)

RegTech or technology aiding Regulatory Compliance has been evolving as per the changing global dynamics in the recent years. RegTech investments initially started gaining prominence in prescriptive compliances area mostly regulations published by various Regulatory Authorities. We saw a slew of RegTech innovations primarily in the areas of Regulatory Reporting, Risk Calculation Engines and Risk Data Management. As times progressed, RegTech innovations also have upgraded from being reactive to producing more proactive technology which aids in Risk and Compliance management. Some examples in these areas are solutions developed in areas of Early Warning Systems, Model Management solutions, Analytics driven reporting solutions and so on.

The Covid period did see rapid growth in investments in RegTech Technology and as per industry estimates the market spending will triple to $204 billion and make up more than 50% of global regulatory compliance budgets by 2026, according to Juniper Research. The Growth can further accelerate if RegTech adoption comes under a Regulatory ambit which lays down adoption patterns for market participant, which will cement confidence levels further and result in a more widespread adoption.

To gather a better view of the adoption patterns we have categorized the Trends at industry level, Geography level and at respective business lines and we observe that the opportunity areas are manifold which exist in most Banking and Financial Services institutes. The below image depicts the trends at varied levels.

Institution Level Geography Level Business Line Level • Focus on smarter Risk Management especially in the early stages of Risk Identification and Prevention by Universal Banks

• Financial firms adopting RegTech solutions with holistic and multi-jurisdictional SaaS-based solutions, along with on demand Analytics for Reg Reporting and Intelligence

• Adoption of Scale able and Integration friendly RegTech solutions across the Financial Crime Lifecycle supporting analytical and reporting capabilities

• Increased adoption of Fin Crime RegTech by US, UK and Canadian Financial Institutions for AML and Anti-Terrorist Financing

• Direct RegTech Acquisition by EU and UK based Banks on the Rise in the areas of Reg Reporting and Reg Intelligence

• Accelerated pace of RegTech adoption in EU, UK and Australia driven by Pandemic and Newer Regulatory Compliances

• Newer AI Regulations to shape the Future RegTech solutions like European Union’s draft Artificial Intelligence Act (AI Act)

• Increased adoption of Digital Banking among Retail consumers

• RegTech solutions to manage Risk functions through the Credit Lifecycle for Retail and Commercial Consumers

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• Increased Digital Transactions due to Pandemic has bought focus on to RegTech solutions to prevent Fin Crime

• Automation of KYC and AML Controls across the Onboarding Lifecycle

If we further break down these trends, we observed the following opportunity areas for RegTech adoption

1. Real Time Risk Analysis and Visualization – There is huge amount of Data Exchange that happens on a real time basis between the Banking systems, For proactive risk management ,real time risk analysis plays a vital role in generating risk alerts which can be analyzed through advanced analytics engines leveraging artificial intelligence, machine learning, natural language processing and cognitive automation. Digital intervention increases automation and fastens turn around times to effectively manage the risk alerts generated.
2. Financial Risk Early Warnings – Banks are struggling to assess the riskiness of their vast customer portfolio. The traditional methods using ratings and financial statements provide post facto analysis. To ensure proactive risk management, banks must efficiently track, assess, and manage counterparties’ riskiness on a near real time basis. RegTech Solutions powered by a machine learning-based algorithm, analyses information on real time basis and generates a ‘Risk Score’ for each counterparty. If the defined hurdle rate is breached, it automatically triggers mails to identified personnel within the bank, who can then activate mitigation measures.
3. Obligation Impact Analytics and Obligation Intelligence – With Changing dynamics we are seeing newer regulations in the climate change ,conduct risk, cyber risk management and capital management requirements ,Firms are looking to invest in automated intelligent solutions which can decipher the regulatory change and help them assess the impact of the changes on their existing landscape ,additionally they are also looking at solutions that can intelligently depict the cross dependencies and overlaps between the regulatory programs for better management and adoption
4. Regulatory Liaison and Auto responses and Reg Disclosures – Regulators issue MRA (matters requiring attention) and MRIA (Matters requiring immediate attention) to Banks and Financial institutions on need basis. Typically, the information gathered involves manual efforts. Bespoke solutions in this area can automate the information management and can also generate automated responses for the regulators.
5. Advanced Analytics for Transaction Monitoring – Many Banks are using exploring Machine learning (ML) models which can enrich transaction monitoring alerts and help predict the AML scenarios before they occur. For enrichment the ML models use customer information, account details, past SAR’s (suspicious activity reports), negative news etc.
6. SAR automation in Global Banks – Several countries are seeing unprecedented levels of Suspicious Activity reports that need to be filed with their respective regulators. To combat this many have started looking at Intelligent automation which leveraged Machine Learning based technologies for automated SAR resolution.
7. Automated narrative Generation for Regulatory reporting – With the Complexities of regulatory reporting on the rise, many Banks are looking to leverage NLG (Natural Language Generation) based solutions to generate automated narratives for tracking the regulatory numbers, which reduces a considerable number of efforts for the Risk and Compliance organization.

While there are a host of trending RegTech use cases that can be adopted by Banks and FI’s, RegTech adoption will need to be holistically looked at two levels. One from the view point of regulators on how they support and bring RegTech adoption under their ambit and secondly from an organization level where a siloed approach for implementing RegTech solutions may not yield desired benefits in terms of cost benefits and efficiencies. RegTech adoption needs to have a structured approach and a framework for adoption at an enterprise level. The Framework needs to give due considerations and leverage existing technology investments, Solutions that help cater to multiple RegTech use cases and seamless integration with the existing infrastructure.

About the Author

Ajay Katara is a Domain Consultant in Banking Risk Management area at Tata Consultancy Services (TCS). He has extensive experience of more than 18 years in Consulting & Solution design space cutting across CCAR Consulting, AML, Basel II implementation and Credit risk, and has worked with several financial enterprises across geographies. He has significantly contributed to the conceptualization of strategic offerings in the risk management space and has been instrumental in successfully driving various consulting engagements. He has also authored many editorials, details of which can be found in his linked in Profile.