Out-Law News 2 min. read

Regtech adoption tipped to grow in financial services

The use of technology that helps businesses achieve compliance with their regulatory obligations is likely to grow among financial institutions in light of the coronavirus crisis, a specialist in financial services and technology law has said.

Lauren Jones of Pinsent Masons, the law firm behind Out-Law, said the chance to achieve efficiencies at a time of economic hardship, and further the digital transformation of their business, will appeal to regulated firms across financial services and encourage them to adopt 'regtech' solutions.

Financial services business adopting regtech solutions need to carry out proper due diligence to ensure that those solutions are secure and reliable to achieve the aim of achieving compliance

"The huge potential of regtech is often seen as being overshadowed by the proliferation of the slick, customer-facing propositions offered by fintechs," Jones said. "However, the impact of Covid-19 and home working has created a more compelling business case for financial services businesses to consider adopting the digital and automated solutions offered by regtechs to replace manual compliance processes and help them comply with regulatory requirements, for example, in relation to 'know your client' (KYC) obligations or regulatory reporting."

"These factors may serve to persuade financial institutions that the advantages to exploring regtech now overcome the barriers to adoption, which include the often lengthy procurement processes of financial services institutions and the lack of impetus to invest in new technology and change from the status quo," Jones said. "However, as the UK's Financial Conduct Authority (FCA) recently highlighted, financial services business adopting regtech solutions need to carry out proper due diligence to ensure that those solutions are secure and reliable to achieve the aim of achieving compliance, rather than creating further risks for financial institutions and their customers."

The FCA has been a long-time vocal supporter of the potential of regtech to help financial services businesses meet their regulatory obligations, having given businesses a say in 2015 on how it can help them use the "new technologies to facilitate the delivery of regulatory requirements". Since then, the FCA has helped a number of developers of regtech solutions test their products and services via its 'regulatory sandbox' – an initiative at the heart of the regulator's 'Project Innovate' campaign that aims to harness the potential of financial technologies (fintech) more broadly.

In an article published earlier this summer, experts from the FCA's regtech team, including Francesca Hopwood Road who leads the regulator's regtech and advanced analytics function, said that the coronavirus crisis provides a fresh opportunity for regtech businesses to demonstrate their utility to the sector.

"The key potentials of regtech include its ability to automate processes to reduce costs, increase consistency, expand coverage and/or improve the effectiveness of compliance," the FCA said. "The increased risk of key staff falling ill, reduced human resources through redundancies or furloughing and a search for savings in a period of economic downturn has further incentivised financial services firms to automate their compliance processes."

The FCA said that regtech could also help financial services institutions identify financial crime, including Covid-19-related scams, as well as take on new customers remotely by embracing digital identity solutions.

However, the regulator urged the regtech community to engage with it with "united voice", highlighting the absence of a trade body that can represent regtech businesses in discussions with regulators.

"Regtech lacks a genuine and robust industry representative body," the FCA said. "This lack of a unified voice has inhibited the ability of the regtech ecosystem to work collectively, and makes it harder for policy-makers and regulators to engage with the industry."

The regulator said it will use the forums open to it, including internationally, to help regtech solutions gain traction around the world.

As part of the Scotland Fintech Festival, Pinsent Masons is hosting a virtual event on 23 September 2020 featuring a panel of experts, including representatives from Fintech Scotland, the University of Strathclyde and regtech business Visible Capital, who will discuss the growing demand for regtech solutions and the barriers to their adoption.

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