The Institute of International Finance has defined RegTech as the use of new IT to meet compliance and regulatory requirements more efficiently. RegTech involves the use of IT to make regulations more stringent and minimise the risks to firms associated with a failure to comply with the rules.

Abhishek Kothari, one of the founders of FlexiLoans.com, has estimated that the annual cost of compliance is now US$70 billion globally and growing at a rate of 14% per annum. As part of this, he expects regulatory technology or RegTech to grow past the $100 billion mark next year.

This month there has been plenty of expansionary activity in the RegTech realm. Lawson Conner, a global RegTech firm, is cashing in on fears of a 'hard Brexit' among Europeans and others. It has seen enquiries for its software triple in the last year. The worry – especially among small financial firms with tight margins and not very deep pockets – is passporting. The UK is about to rely on 'equivalence,' that nebulous EU word that grants the European Commission the right to decide which country is 'equivalent' and therefore which country's funds can sell their wares within the EU's borders. Small and mid-sized firms lack the wherewithal to relocate easily or apply for licences in other countries. Lawson Conner gives them access to integrated fund software and Manco services for AIFs, UCITS and RAIFs. (There is a glossary at the end of this article.)

Also this month, London's FNA closed a $5.5 million Series A investment round led by IQ Capital, with participation from GETTYLAB. It will use the funds to develop its platform and other products "to help financial regulators and institutions operationalise advanced data analytics, identify fault lines in the financial system and prepare better for financial crisis and cyber-threats." It wants to expand in the US and Asia Pacific and go beyond its existing client base of central banks, regulators and Financial Market Infrastructures or FMIs. Last September it won the Central Banking Fintech Regtech Award of “Best Analytics Solution Provider.”

ComplyAdvantage, another British RegTech firm with its headquarters in Westminster, has opened a new office in Covent Garden and an office in New York. It has tripled its Annual Recurring Revenue and more than doubled its headcount (to 200+) since last July. More offices are to be dotted around the world shortly.

Sydney-based Kyckr has raised A$5.2 million (before costs) in a placement from both institutional and private investors. It has made good progress in the last few months with the launch of its improved digital platform, Kyckr.com, for know-your-customer (KYC) authentication. It has collaborated recently with AXA Singapore, the insurance carrier, and with DemystData and ESC, the global data platform providers.

Sensiple, the capital markets and banking technology specialist, is bringing its RegTech product SETREGA for MiFID II, SFTR and EMIR compliance and reporting to the FR2 data centre in Frankfurt (the Frankfurt FR2 IBX facility at Friesstrasse) as part of a new agreement with Transaction Network Services (TNS).

Search Engine Optimisation or SEO is the science of improving search engine rankings; PPC stands for pay-per-click, a good way of generating return on investment. The two often work well together. This is how the anti-money-laundering (AML) firm of SmartSearch has come to appoint Epiphany, a Jaywing agency, to manage and extend its SEO and PPC activity. A new website is to be built with Epiphany's help. SmartSearch also expects Epiphany to help it become the best RegTech firm in the UK. This is a tall order.

Also this month, Polymath has gone into partnership with the QRC Group. Polymath's users, especially those that operate in the Asian securities markets, are going to have more access to consultancy services. QRC develops end-to-end software for Security Token Offerings (STOs) and secondary market trading.

The RegTech sector is also prospering in another market - India. The research firm of Tracxn reports that RegTech funding in the subcontinent has gone up five times in the last year - from US$7.26 million to $43.5 million. Tracxn lists Simility, CrediWatch, Digio, Fintellix, DotAI, NextKYC, Credible Ninja and Idfy among the most well-funded RegTech start-ups of the year. They cover the whole gamut of e-KYC verification, fraud detection, financial scoring, KYC compliance, AML control and more.

Digital transactions in India have exploded in number in the last few years, creating a lucrative market for RegTech in the field of AML and fraud control. Another great push towards RegTech has been the regulation of financial technology or FinTech companies which service financial customers. The Reserve Bank of India produced some severe KYC rules in 2017, driving some dozen smaller FinTech firms (which lacked in-house 'RegTechs') to the wall. Cyber-attacks are also on the increase, prompting many firms to use the services of RegTechs. Two years ago, malware from NotPetya and Wannacry caused havoc and attracted the attention of regulators.

Raiffeisen Bank International, meanwhile, has joined a funding round (sum undisclosed) to finance kompany, an Austrian business verification and KYC RegTech. Also funding the new-ish company were the venture capital arm of Uniqa Insurance and such previous investors as the European Super Angels Club. Raiffeisen placed its contribution through Elevator Ventures Beteiligungs GmbH, a wholly-owned subsidiary that specialises in corporate venture capital. kompany uses Artificial Intelligence (AI), robotic process automation (RPA) and blockchain technology.

New ventures

The RegTech world is abuzz with new ventures. SteelEye, the RegTech and data analytics firm, provides compliance software that consolidates trade, order, communications, market and reference data on one platform. The company has recently teamed up with a FinTech company called Gold-i. Data flows from Gold-i into SteelEye.

The world-girdling regulatory intelligence firm of Thomson Reuters seems to be holding its own RegTech version of Dragons' Den, offering the winning firm the prospect of becoming its partner on joint ventures if it jumps through some hoops. RegTech start-ups have until 9th September to sign up on the Thomson Reuters website and be judged on their 'value propositions,' their market opportunities, their partnership potential and their slick presentational skills. Only start-ups funded by seed money or Series A capital need apply. The panel of executives will hear their pleas on 29th October in New York.

Studies

Various studies are proclaiming RegTech's boundless potential to an agog audience. In July last year ARC, Analytical Research Congnizance, produced a report that predicted: "The global RegTech market revenue is estimated to be $2,321.5 million in 2018 and is expected to reach $7,207.6 million by 2023, growing at a compound annual growth rate of 25.4% during the forecast period 2018–2023. The solutions include compliance management, reporting, identity management, and risk management. The compliance management solution segment is expected to grow at the highest compound annual growth rate during the forecast period. The solutions help organizations in key compliance areas and risk aversion for AML, KYC, MiFID II, Basel III, PSD 2, Solvency II, and AIFMD."

The report added that the adoption of RegTech was the highest in Europe owing to strict rules and directives for financial transactions and data protection. The Asia Pacific region holds a huge potential for the vendors and ARC expected it to grow at the highest compound annual growth rate during the forecast period, 2018–2023.

According to another expensive report, this time by Grand View Research in San Francisco, the global RegTech market size was valued at US$2.87 billion in 2018 and ought to expand at a compound annual growth rate of 52.8% between 2019 and 2025. High compliance costs and growing demand for regulatory intelligence are expected to contribute to the adoption of RegTech over the next six years, according to the report. Rising penalties for non-compliance with regulations are also going to play a large part in RegTech's rise.

Trade body activity

The Fintech Association of Hong Kong, the Singapore Fintech Association and the Fintech Association of Japan have joined forces to form the APAC RegTech Network. So far, it is a talking shop only. The go-to RegTech man at the Hong Kong association told the press: “Our aim is to operationalise already executed MOUs through focused cross-border engagement. We will start with periodic online meetings between the RegTech committees, aimed at fostering education and implementation of RegTech through sharing insights on regulatory developments and emerging technology solutions.”

What the regulators say

The Australian Securities and Investments Commission (ASIC) Regtech Financial Advice Symposium took place this week. At it, a gung-ho Daniel Crennan, ASIC's deputy chairman, repeated the mild words of a colleague about ASIC "keeping an open mind" on the subject of RegTech but then blasted away all pretence at ambivalence on the subject: "We’re here to showcase new technologies that have the potential to help advisors and entities meet their regulatory and professional requirements. The status quo is no longer an option. ASIC expects more. Consumers expect more."

He added that ASIC had plans to 'build capability' in behavioural sciences, data analysis and artificial intelligence, while co-ordinating technological initiatives with other regulators.

All compliance experts are aware that regulators like to pretend to be "technology-neutral," in the parlance of the old Financial Services Authority in the UK. The "tech-neutral" regulator presents itself as one that does not care how a firm obeys its rules – perhaps using manual systems, perhaps using IT – as long as it does so well. The old FSA struck this pose in the mid-'noughties in the AML arena, arguing that any bank could keep using manual systems if it wished to – Lloyds Bank was the last of the major banks to automate. Behind the scenes, however, the FSA twisted banks' arms and lobbied very strongly for the take-up of software vendors. Technological neutrality is an impossible act to keep up all the time.

ASIC follows the 'neutral' line where it can as well, although not very convincingly or emphatically. Witness the testimony of Cathie Armour, one of its commissioners, speaking in London on 3 July 2018: "We like to think that our regulatory regime is sufficiently principles-based that it operates in a technology neutral way. But we do know that this is not always so; pragmatism means that we frequently amend our regime to facilitate new technologies. For example, we have facilitated electronic securities offering documents. We also adapt the way we regulate to reflect the technological needs of the day. For instance ASIC’s Innovation Hub helps ASIC to engage with new Fintech and RegTech start-ups."

John Price, another commissioner, sounded more disinterested in laying down technological demands on 12 November 2018: "We also believe it is important for regulators to keep an open mind and try to harvest the benefits of RegTech by adopting a technology-neutral approach." The latest known comment on the subject came from Commissioner John Price on 1st December 2018: "ASIC’s approach to RegTech is to...adopt a technology-neutral approach to regulation where possible."

This is fast becoming impossible on all fronts. Both British and American regulators have long been experimenting with issuing rules in the form of machine code, and this promises to put regulatory involvement in RegTech on a new and more exacting footing. The FCA’s "machine readable, machine executable" policy is a case in point. The hackathons and techsprints of the future can only push financial markets further down this road, as regulators crave more data from their flock and the spiralling costs of compliance personnel push firms towards software that does large swathes of the compliance officer's job for him.

Glossary

• Manco - management company
• AIF - alternative investment fund
• UCITS - Undertakings for the Collective Investment in Transferable Securities
• RAIF - Reserved Alternative Investment Fund, available in Luxembourg
• MiFID II - the European Union's second Markets in Financial Instruments Directive
• Basel III - the third set of international banking regulations developed by the Bank for International Settlements in the Swiss city of Basel to promote stability in the international financial system
• Solvency II - the European Union's second Solvency Directive, which mainly concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency
• PSD2 - the EU's second Payments Directive
• AIFMD - the EU's Alternative Investment Fund Managers' Directive
• APAC - Asia Pacific
• MoU - memorandum of understanding