The success of the Digital Regulatory Reporting (DRR) programme highlights the opportunity that regtech presents and the increasingly important role technology will play in compliance, says Leo Labeis.
Since the financial crisis of 2008, regulatory compliance has become top of the agenda for banks and other financial institutions across the globe. Business and operating models have been transformed to mitigate risk and adhere to new and evolving regulatory requirements – and this trend is only set to continue in the coming years.
The demand for solutions that address the mounting complexity of these new regulations has given rise to a new and rapidly growing area of financial technology: the regulatory technology (regtech) sector. The global regtech’s market size is expected to grow from USD 5.46 billion globally in 2019 to USD 28.33 billion by 2027, with spending estimated to make up more than 50% of global compliance budgets by 2026.
So, what are the forces driving this growth and how should we expect regtech to evolve in the year ahead?
Mission-critical technology
Regtech solutions are not just a ‘nice-to-have’— complying with regulations is a mission-critical part of businesses’ operations and is often beyond the reach of legacy technology. Since the 2008 crash, global regulators have stepped up their scrutiny of banking practices and imposed more than USD 300 billion in fines and penalties on banks. To avoid penalties, financial institutions have increasingly turned to technology-driven solutions that can help maintain the accuracy of regulatory disclosures and meet compliance requirements.
In addition, many G20 regulatory reforms are currently under way. The amendments to the Commodity Futures Trading Commission’s swaps reporting rules (CFTC Rewrite) in December 2022 – as well as upcoming changes to several Asia-Pacific reporting regimes and the European Markets Infrastructure Regulation (EMIR) Refit in 2024 and beyond – are part of a global overhaul of G20 trade reporting rules. Regtech is playing a central role in helping firms comply with these ever-evolving standards.
The realisation that constant regulatory changes are a fixture has significantly boosted regtech applications. According to the Global City 2021 RegTech report, almost two-thirds of regtech firms experienced sales growth in 2020. Meanwhile, KPMG expects regtech “to continue to remain hot” in the wake of macroeconomic headwinds and upcoming regulatory changes.
Regulators and supervisors themselves have ramped up their involvement across a number of regtech projects. As part of the G20 Tech Sprint 2020 – a virtual hackathon organised by the Saudi presidency of the G-20 nations and the BIS Innovation Hub – REGnosys and ISDA developed a digital regulatory reporting pilot for the derivatives reporting obligations set by the Monetary Authority of Singapore (MAS).
The European Commission’s Machine Readable and Execution Reporting Requirements (MRER) proof-of-concept is also leading to actionable recommendations to the various European Supervisory Authorities. These types of initiatives demonstrate regtech’s real-world impact, providing the catalyst for the industry adoption of such solutions.
Digital Regulatory Reporting: a flagship use of regtech
Typically, three common denominators are the hallmark of successful regtech implementation—collaboration, standardisation and the spur of regulatory change. One of the most successful implementations that features all three is the Digital Regulatory Reporting (DRR) programme.
Regulatory reporting is a complex and expensive area of compliance. For instance, the Bank of England (BOE) estimates that regulatory reporting activity costs UK banks a minimum of GBP 2-4.5 billion annually. Reporting firms face an array of overlapping, often ambiguous and ever-changing data requirements across jurisdictions. For every reporting regime, firms must typically sift through hundreds of pages of legal text, which they must then manually interpret and code in their IT systems.
Instead of each firm individually interpreting the rules, DRR allows market participants to work together to develop a standardised interpretation of the regulations and store it in an openly accessible format as both human-readable and machine-executable code. As a result, DRR is also emerging as a primary tool to help mitigate any divergence between jurisdictions. Collaboration works because there is no competitive advantage in reporting differently from other firms – in fact, using a standardised interpretation reduces noncompliance risk.
Following ISDA’s launch of the full open source version of the DRR model, with an initial focus on the CFTC Rewrite which went live in December 2022, firms can now leverage DRR in a live production setting. Firms that invest now will have a strong foundation to utilise fully digitised reporting requirements for several revised Asia-Pacific reporting regimes which are expected to go live in 2024, in addition to EMIR Refit in Europe.
Regtech’s short term hurdles
Although technology is a vital enabler of compliance, the financial sector needs to overcome several challenges. For example, over 10% of regulated institutions cite complex onboarding processes as a major hinderance. Vendors and financial institutions will therefore need to find ways of ensuring that firms have the right infrastructure in place to integrate regtech into their operational systems.
Likewise, although regtech has grown rapidly, many financial services firms lack full understanding of how these solutions work and the benefits they bring. According to the Financial Conduct Authority (FCA), 41% of industry participants believe that regtech companies could communicate their offering more clearly.
Emerging technologies naturally come with barriers towards widespread rollout and adoption, but this should not detract from the exciting opportunities that regtech presents. Looking ahead into 2023 and beyond, programmes like DRR are a strong indicator that regtech will continue to lead the way in financial innovation.
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By Leo Labeis, Founder and Chief Executive at REGnosys.
