The use of technology to streamline the regulatory process in financial services continues to grow and evolve at a rapid pace. Last year, Insight explored the state of the RegTech market to understand the potential impact of the Covid-19 crisis on the sector. Initial views were that the increased digitalisation of financial services could result in a positive turn of events for the RegTech industry and help accelerate adoption of RegTech solutions in tackling new types of financial crime and changing regulatory rules.
Recent data suggests that the opportunity afforded by RegTech solutions is being realised, with RegTechs having raised $8.3bn across 348 deals in 2020, beating the previous high of $7.2bn set in 2019, demonstrating that the industry is still able to raise funds and expand.
While interest in the sector is high, with an increase in research into the state of RegTech and what the future holds, a voice that has been often missing in RegTech conversations, however, is the perspective of the demand side. How do buyers of RegTech solutions view RegTech firms? How do they engage? And what are the building blocks of creating a truly inclusive RegTech market?
It turns out that customers are very satisfied with what RegTech can provide. But there is also demand for better communications from the industry, better technology integration and for standards and certification.
They also believe regulators have a vital role to play in the future of RegTech.
Perspective of the Buy Side
In an attempt to give a platform for those firms to share their views, the FCA commissioned an external agency to conduct quantitative research among large UK financial services firms. The research agency conducted 500 online interviews and 20 in-depth interviews with senior decision makers in Compliance or Innovation roles, at UK based FS businesses with 200+ employees. All firms either currently have RegTech or are planning on implementing it in the next 2 years. The focus was on the current state of play, the perceptions of RegTech and the FCA’s role, as well as the impact of Covid-19. The research also captured feedback on the future of RegTech, as seen by the firms.
It is important to note that for the purpose of this research, we defined RegTech as “solutions designed to make specific regulatory processes more effective and efficient, or larger, multi-faceted technology projects designed to modernise regulatory compliance functions across organisations” to capture both in-house and outsourced solutions. The need for a commonly agreed definition of RegTech to reach agreement on what falls within the scope of the field is discussed later in this article.
Keeping the customers satisfied
By speaking to senior decision makers in compliance and innovation roles, we received a good understanding of how firms engage with RegTechs and what the onboarding journey looks like - a crucial part of the adoption process.
Currently, the most popular option for RegTech onboarding is a combination of outsourcing augmented by in-house development (41%), with this preference expected to only increase in the future. Cost effectiveness is the main driver behind buying directly from a vendor, while ease of process and ‘keeping it within the business’ is a leading motivation for developing in-house solutions (especially if there is an already complicated internal system). It is also important to note that ‘word-of-mouth’ recommendations and reputation play a key role in the decision-making process, with financial services organisations tending to trust solutions that have been advocated by their peers within the industry.
Once in place, satisfaction with RegTech solutions is consistently high, with net satisfaction at 95% for all businesses, due to manifold perceived benefits. Improved compliance is seen as the most important benefit of employing RegTech solutions. Regulation and compliance are considered complex and ever evolving, with RegTech increasingly seen as the bridge between the firm and regulatory requirements, enabling the business to fulfil its regulatory obligations more efficiently and therefore focus on its core offering.
Increased efficiency created by implementing RegTech solutions was the next most commonly cited benefit, improving the company’s position and staying competitive. Smaller firms in the sample, those with between 250 and 499 employees, emphasised being more easily and better able to comply with regulations and improving the company’s position as main reasons to develop/purchase RegTech in the business.
The key impacts of RegTech on the business are captured in the below case studies from interviewees.
Any consideration of the current RegTech market needs to take into account the effect of the Covid-19 pandemic on financial services firms, with a raft of regulatory measures to protect market participants and consumers being introduced over its course.
Firms have seen an increase in regulatory obligations, leading to a need to reprioritise internally. In the face of this demand for RegTech solutions has remained stable (52%) or has increased (43%) with a shared expectation among the industry that RegTech will be more firmly established as a trusted partner following the end of the crisis. In the medium to long-term, most businesses (60%) believe that the RegTech sector will remain important or grow in importance in the future, with many believing that RegTech adoption will be universal among firms (52%).
These findings reflect the sentiment identified in our previous Insight article, noting that the Covid pandemic had brought into clearer relief the need and business case for financial services firms to adopt RegTech solutions.
Room for improvement & future ideas
Having established that there is significant demand for RegTech solutions among financial services firms, the question then becomes; How does the sector capitalise on this growing demand for their products and services? Two areas from the research that clearly stand out are vendor communications and technology integration.
Industry participants noted that communication from the RegTech sector could be clearer (41%) and better present the RegTech ‘offering’. RegTech can involve complex areas and concepts. An ability to better articulate both the problem their product is aimed at and the solution it provides was emphasised, particularly by smaller firms with between 250 and 499 employees, as an important step toward increased adoption.
It has been observed within the RegTech ecosystem that RegTech firms have the challenge of making the leap from ‘proof of concept’ to demonstrating clear ‘proof of value’ – essentially telling the RegTech story. The FCA have recently concluded a pilot ‘digital sandbox’ designed to assist innovators to both develop new solutions and products through access to synthetic data assets, and demonstrate the potential value of these products to the market by way of an observation platform open to market participants. The FCA has published an evaluation of the pilot and plans a second pilot focussing on issues surrounding sustainability and climate change.
The research also identified that, in addition to better articulation and demonstration of value, other commonly cited obstacles to adoption were the need for better interoperability (38%) and integration of technology (41%), especially among firms with large or complex legacy systems. Enabling financial services firms to link multiple systems and allow for easier integration is considered crucial when considering new technology and processes. This is a key area for RegTechs to consider when developing solutions for their clients in the financial services industry.
Linked to both financial services firms’ engagement with RegTechs and the procurement process, (and the preference for both in-house development of RegTech tools and outsourcing/purchasing of RegTech solutions) is the developing trend for a ‘one-stop-shop’ RegTech offering. As firms seek simplicity and ease of integration, there is a demand for their compliance and regulatory systems and tools to be interlinked and in one place.
This preference for integrated and ‘joined up’ end-to-end RegTech solutions has potential implications for the RegTech market, which is currently highly diversified with 400+ companies working across various specialty fields. What could be the implications of this demand-side trend on the RegTech market? Is the natural evolutionary step of the RegTechs sector one that sees integrated platforms allowing, via common APIs and data standards, multiple products and solutions to sit side-by-side – essentially a ‘plug-and-play’ model?
Or could the desire for ‘one-stop’ shops’ lead to market concentration with ‘holistic’ services offered by a relatively small number of companies? Consumer research shows that one-stop-shop offerings could lead to better prices and benefit customers, however, no research of this type has yet been carried out into the RegTech sector.
Role of the regulator
The research also indicated what respondents would like the role of the FCA to be in regard to RegTech. Respondents were aware of the FCA’s efforts to promote the adoption of RegTech among regulated firms and provided positive feedback for the work carried out so far. Smaller firms were more likely to have contacted the FCA in relation to RegTech than larger firms within the sample, perhaps reflecting that larger firms have the resources to better evaluate and consider the pros and cons and implementation requirements without requiring assistance from the regulator.
However, experience also shows that larger firms can find organisational ‘buy-in’ with the RegTech sector challenging to achieve beyond dedicated innovation functions within large firms. Initiatives like the Digital Sandbox Pilot and the FCA RegTech Forum programme are designed to play a role in bridging this gap, but there is more for the FCA to do. There is a clear demand that the FCA should continue its role of bringing the RegTech ecosystem together through raising awareness of RegTech (43%) and encouraging innovation (35%).
One of the more thought-provoking conclusions and asks from the buyer side is the wish to explore a RegTech certification or accreditation scheme, an issue raised in the recent Kalifa Review of UK FinTech. As demonstrated in other markets, such as cyber security, certifications have been successful at establishing markets and ensuring a certain level of quality of products and services.
The FCA itself is not in a position to act as a certifying body as it could conflict with the regulator’s competition remit. But other institutions could ‘step-up’ and explore whether such a scheme would be feasible and would enable a stronger and more robust RegTech ecosystem.
Our previous article on RegTech highlighted that the UK RegTech ecosystem suffers from a lack of a unified ‘voice’ to articulate its needs and offerings. As well as playing a role in overcoming some of the communication obstacles the sector faces as outlined above, a strong, united and independent trade association could be the natural place for a certification system to reside.
As with all research, this study has its limitations and it provides a partial view of the world of RegTech innovation in financial services. It does, however, highlight several areas for consideration for regulators, financial services firms, FinTechs and RegTech firms.
It shows that RegTechs have weathered the Covid-19 storm and that they have an important role to play in the world of compliance. But there are still areas where they could improve. The FCA needs to continue its advocacy role to enable the future growth and development of this ecosystem.
In the future, we expect to see other areas of financial services starting to play a bigger role, as RegTech is rapidly being applied in more sectors than the usual retail and compliance space. We also see RegTech playing a more prominent role in the important conversation on sustainable finance and Environmental Social and Corporate Governance (ESG) reporting, with RegTechs using their current regulatory reporting expertise to improve the status quo. Similarly, other sectors, such as energy and healthcare, are looking to adapt some of the financial services RegTech solutions to meet their own strict reporting requirements.
This research has investigated the current uptake and experience of financial services with the RegTech sector. As mentioned, ‘RegTech’ is itself a loose ‘cover-all’ term with a variety of definitions being attached to it. At its broadest and simplest, it is the application of technology that helps firms comply with regulations more efficiently and effectively.
As RegTech continues to grow in importance to the financial services, the study of its development and benefits, and the obstacles to its adoption, will likely benefit from a more detailed and refined classification of its various facets – a RegTech taxonomy that clearly identifies the various fields of expertise and technologies that comprise the RegTech ‘offer’. This is also reflected in the growing adoption of RegTech technologies by financial regulators across the world and the emergence of the ‘SupTech’ (supervisory technologies) field.
A universally agreed taxonomy can help stakeholders to ‘speak the same language’, refer to the same concepts and enable the RegTech ecosystem to grow. It can act as a foundation for further academic research into the RegTech field and a starting point for the development of crucial standards to support RegTech advancement. Research has been carried out in the past, however, we believe there is a need for a definitive RegTech taxonomy to differentiate it from related fields such as FinTech and SupTech, so that policymakers, industry and academia alike can better understand the needs of the sector, and importantly its undoubted benefits.