Regulatory Technology: The New Way of Managing Regulatory Compliance
By Ankita Tripathy
19 November, 2024
Finance
Last Updated on: November 25th, 2024
Regulatory technology is fast becoming the way business regulations will be managed. From regulatory processes within the financial and technology industry to different business processes – the primary function of RegTech is monitoring, reporting, and ensuring compliance.
RegTech in financial services can streamline businesses’ adherence to regulations and avoid hefty fines. This is not just the work of individuals but a group of companies that look for regulation compliance.
The following article will introduce RegTech for beginners and explore how it is changing the world of regulatory compliance altogether. The power of tech is mesmerizing!
What is Regulatory Technology?
Regulatory technology is self-explanatory until you start scratching the surface. The RegTech achieves this proper compliance using technology that helps companies accomplish compliance with the necessary regulations.
RegTech uses technology’s power to transform the workspace and empower processes such as compliance. From using AI and natural language processing to other digital tools, regulatory technology ensures your business prevents expensive mistakes such as non-compliance.
But what gave rise to its development? We all know necessity is the mother of invention, and a similar case brings us to this day. Several factors pushed the birth of regulatory technology across sectors, from crisis management to becoming relevant by adopting advancements.
Here’s how it all began.
Why Does the Need for Regulatory Technology Arise?
It all began in 2008 when the world was going through a massive financial crisis and the need to avoid repeated history. Several FinTech companies increased during this period following the rise of technological use within the financial sector.
The crisis saw hope in the rapid technological advancements that could improve customer engagement and experience. Another massive factor contributing to the rise of regulatory technology is the poor use of consumer data.
You may have noticed a sharp rise in data breaches that puts consumer data at risk along with sensitive corporate information. So far in Q3, more than 420 million-odd records have been exposed due to data breaches.
But how is a data breach connected to this? There is a direct link between data breaches and regulatory technology across sectors, especially in the corporate world. This is where enterprise risk management steps in. The increasing use of consumer data to inform marketing and promotional strategies has an ugly side – compromised consumer data.
Something as severe as this puts consumers’ data at risk by exposing their sensitive information and causes financial and operational losses for the business. Regulatory bodies thus emphasize the need for data privacy and distribution laws to curb such exposure. Companies incorporate identity management in this practice, too.
This and the rising dependency of sectors on technology takes us to the need for regulatory technology.
7 Components of RegTech That Boost its Performance
The following are the components of regulatory technology that ensure compliance with the regulatory technology:
1. Regulatory Reporting
Regulatory technology helps generate and submit accurate business reports to the regulatory authorities.
2. Risk Management
RegTech also identifies potential regulatory risks and gaps in the company’s processes. It is also the most important component of regulatory technology as it helps proactive mitigation of potential issues.
3. Compliance
Another one of the most important components of RegTech is compliance, which is an important service. Compliance with the regulations is what holds this entire phenomenon together. The RegTech providers use technology such as machine learning, AI, and blockchain to deliver compliance services.
Moreover, advanced analytics also supports RegTech in boosting a company’s compliance with regulatory guidelines/standards.
4. Transaction Monitoring
This component of regulatory technology is crucial to save a lot for companies. From financial loss to reputation and, in some cases, employees. RegTech can use algorithms for analysis and flagging suspicious wealth transfer.
This protects against money laundering and suspicious unauthorized transactions through automated transaction monitoring. Regtech also creates smart contracts that help automate the approval or rejection of transactions based on predefined rules.
This includes a strong process that helps with crypto AML (Anti-money laundering software) and transaction monitoring.
5. Regulatory Intelligence
The regulatory intelligence component of RegTech takes care of complex compliance tasks such as monitoring transactions and generating regulatory reports. This is collecting, analyzing, and interpreting information on regulatory changes, requirements, and trends. This is part of regulatory change management.
These affect costs, comprehension of regulations, monitoring compliance, and identifying risks related to systemic issues in human processes.
Regulatory intelligence empowers this process by creating automated updates and alerts when updated or new regulations occur.
In addition, it allows prompt response from the compliance team.
6. Monitoring
The continuous transactions undertaken during a business are huge to manually monitor. However, with the help of regulatory technology, transactions, behaviors, and compliance metrics can be overseen automatically.
This ensures adherence to regulatory standards and supports detecting any unusual activities as they happen – in real time.
This proactive approach helps efficient risk management, fraud prevention and compliance maintenance.
Monitoring, in general, helps track unusual activity to prevent fraud, manage risk, and maintain compliance. Moreover, with the help of AI and machine learning, the tools effectively analyze customer behavior and detect anomalies that indicate risks such as fraud.
For instance, it can forewarn a possible fraud by tracking sudden transaction frequency or amount changes. This can trigger a review that alerts the company.
7. KYC and AML Compliance
Know-your-customer (KYC) and Anti-money laundering (AML) processes intersect different parts of the RegTech process. This tells us how important these two are in fighting financial loss for companies through fraud.
RegTech uses advanced technology such as machine learning, AI, and automation for streamlining and enhancing AML and KYC – making them more accurate, efficient, and secure.
One of the key roles of KYC is to automate identity verification. RegTech also incorporates OCR or Optical Character Recognition and biometric verification to verify documents, reducing manual checks and errors.
Lastly, the use of blockchain technology and secure encryption allows protection for sensitive customer data.
Financial Planning With Regulatory Technology
Now that you know how seamlessly RegTech integrates into FinTech, it is easier to know how your business can benefit from the strategy. Let’s look at some financial wellness tips with RegTech:
Automated Tracking and Budgeting
RegTech tools can come in handy when automating spending, income, and investment. This gives your business real-time insights into financial habits and helps set realistic goals.
Risk Management
RegTech uses data analytics to assess investment and savings risk which helps tailor financial plans to a business’ risk tolerance. It also takes care of the profile.
Tax Efficiency and Compliance
Regulatory technology ensures the financial strategies within a business comply with regulations. This minimizes penalties, fines, and tax liabilities. This is through the efficiency in tax planning that ensures there is no scope of liabilities.
Investment Monitoring
RigTech solutions provide continuous monitoring of investments, which improves prompt action by sending alerts as soon as something is detected. This is particularly useful for dynamic portfolios.
Enhances Security
The use of regulatory technology is increasing across sectors due to the level of security it provides. The user can easily improve their system security due to the use of the latest technology and alert systems that make it easier for companies and businesses to track suspicious or fraudulent activity.
Moreover, the continuous tracking and monitoring of essential financial data gives the users peace of mind. This is all about maintaining and enhancing financial and privacy integrity.
Notable RegTech Companies
A few notable companies provide regulatory technology services and are doing great work in the sector. Check these out:
- Trunomi is doing exceptional work in securing consent to use consumer personal data. This is an essential service at a time when security breaches are leaving clients’ data vulnerable.
- IdentityMind Global is another RegTech company that provides risk and anti-fraud management services through payment entity tracking of digital transactions.
- Silverfinch connects asset insurers and managers through fund data utlity that meets Solvency II requirements. Solvency II is a formula-based figure that must be held by insurance and reinsurance companies in the EU.
- Suade makes submitting regulatory reports easier for banks without disrupting their architecture.
- Fund Recs oversees data management and processing through the fund industry.
- PassFort is a RegTech company that automates collecting and storing customer due diligence data (assets, business, etc.).
End Note
That was all about regulatory technology and how it makes things easier for businesses and companies to avoid non-compliance with regulations. RegTech uses technological tools such as AI and ML to improve its performance. This is essential in improving fraud prevention, audit trial, employee surveillance, and customer transaction surveillance.
With the help of RegTech, companies can improve their security against fraud and financial loss. The article also highlights notable companies doing great work in the sector, improving customer experience and regulatory compliance.
Read More:
