What Is 'RegTech?'

By Casey C. Sullivan, Esq. on December 05, 2016 | Last updated on March 21, 2019

You've probably heard of FinTech, the application of emerging technologies like artificial intelligence and data analytics to the financial services industry. We're sure you're familiar with #legaltech too, the infusion (albeit a slow one) of cutting edge technology into the legal industry.

But do you know about RegTech? This new, tech-heavy approach to regulatory compliance is increasingly showing up on some in-house counsels' radar.

RegTech 101

Simply put, RegTech is the application of technology to regulatory compliance. RegTech companies are using cloud computing, data analysis, AI, and even biometrics to help businesses comply with government regulation, avoid fines and other enforcement actions, and identify areas of concern.

Right now, the RegTech industry is largely focused on banks, helping Wall Street adapt to increased regulation. Banks currently devote 15 to 20 percent of the total "run the bank" cost base to governance, risk, and compliance, according to estimates from Bain & Co. Those GRC concerns are responsible for 40 percent of costs for "change the bank" projects as well. RegTech tries to reduce those costs through technology and automation.

How's that look in practice?

Here's a quick illustration from the Financial Times:

A new artificial intelligence system can monitor traders, learn their behaviour patterns and raise the alarm when they do something out of character.

For example, a trader who has avoided securities for a long time after suffering a loss on them suddenly dives back into a losing position. This triggers an alarm in the monitoring system and sends an alert to the hedge fund's compliance team.

It's a high-tech Big Brother in the service of regulatory compliance.

RegTech in Action

Of course, RegTech isn't all hedge fund AI spying. Different RegTech services seek to address different problems and the Institute of International Finance has identified seven major areas where RegTech could be applied beneficially. These are:

1. Risk data and aggregation
2. Modeling, scenario analysis, and forecasting
3. Monitoring payments transactions
4. Identification of clients and legal entities
5. Monitoring internal culture and behavior
6. Regulatory tasks in trading in financial markets
7. Identifying and interpreting new regulations

Some companies are already employing RegTech to help meet regulatory requirements. Citigroup, the Financial Times notes, passed the Fed's stress test after it partnered with Ayasdi, an AI and data analytics company founded by researchers at Stanford. Ayasdi uses topological data analysis to find patterns and relationships between massive amounts of data.

Still, the RegTech market is just in its infancy. As technology evolves, and compliance programs continue to shift, expect the RegTech market to transform as well.

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