Coronavirus: Could crisis be a tipping point for compliance and ‘RegTech’?
We are living in unprecedented times. Due to the human disruption caused by the coronavirus pandemic, a financial downturn is upon us. Against this difficult backdrop, it is my belief that ‘Regtech’, regulatory technology, is very well positioned to weather the storm.
Regtech does what it says on the tin: it uses new technology, often AI, to better deliver regulatory requirements – automating and standardising processes. In the short term, this pandemic has brought about new money laundering opportunities. As times become more desperate, people are more likely to be caught up in money muling schemes and fall victim to fraud. Additionally, lockdown has brought about a global shift in spending behaviour; and government incentives create new opportunities for fraud. It’s the perfect storm for increased financial crime. Therefore technologies that aid the swift and cost-effective application of financial regulation will be in demand.
However, I want to focus on the long-term opportunity for regtech, which is built on a unique advantage of the sector: it is premised on something fixed – laws.
Of course, laws are changed constantly. But we live in a time where there are more laws than ever before. In addition to the 80 volumes and supplements of English statute, there are 21,000 regulations made by ministers under statutory powers. Over the last few years, we have seen the introduction of the likes of FinCEN, OFAC and ISO – the acronyms that show governments and regulators trying to keep up with our globalising, tech-driven world.
And this means that, while falling foul of laws and regulations is rarely purely accidental, there are now an unprecedented number of which to fall foul. To comply with the Financial Action Task Force (FATF) – to take the intergovernmental example – companies have to implement Know Your Customer (KYC) ID verification measures, keep records on high-risk clients, execute on recommended due diligence measures, regularly monitor accounts for suspicious financial activity and report that activity to the appropriate national authority. They also have to enforce effective sanctions against legal persons and entities that fail to comply with FATF regulations.
In the past year, in the UK alone, we have seen the collapse of London Capital and Finance, which still owes millions to thousands of investors, the ongoing bad treatment of SME customers at the hands of RBS’s Global Restructuring Group, Lloyds last month writing off tens of millions of pounds of debts in regard to the mistreatment of customers at HBOS’s Reading branch.
As the world gets bigger, along with the institutions that move money around, regulation does provide us with a way to keep consumers safe. However, it usually has to be introduced quickly and, combined with the sheer scale of the task, this invariably means a one-size-fits-all approach.
The consequence of this is that the world needs regtech (which itself is a fairly hamfisted way of describing the many businesses that automate regulatory compliance across global industries) more than ever. Unlike the laws that determine their existence, regtech companies are designed, in their very fabric, to automate processes in a customised way. Businesses like mine, ComplyAdvantage, use cutting-edge technology to help businesses fight financial crime. Then you have the likes of Trunomi which gives companies a complete overview of their customers’ data, and Suade, which enables banks to deliver required regulatory reports without disrupting their architecture.
Many of us are using AI and machine learning to provide dynamic, real-time and automatic solutions to a wide range of businesses. We are not simply data platforms that collate and analyse historic information, but software that becomes the fabric of business – monitoring every single transaction or interaction in real-time and acting as connective tissue for each of our customers.
And the way we are doing this is still new. It used to be the case that regtech referred to government-led implementation of its own rules or big bank-led initiatives like the 1990s’ “Financial Services Technology Consortium” – innovation was paltry and was not the domain of the private sector. Now, the advent of the cloud and open APIs means private companies can build solutions that are universal and end-to-end. As the regtech party gets bigger, expect to see numerous companies building increasingly smart software that can sit, invisible but vital, at the heart of businesses.
Why is this so important? It’s worth quoting Warren Buffett here: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” As the world continues to globalise – and we are only in the foothills – companies and institutions will get larger and larger. The number of transactions and interactions will continue to grow, exponentially at times, bringing mind-boggling high levels of complexity. Any error, therefore, brings vastly amplified risk. Moreover, competition will ramp up; one slip will mean curtains.
The only way for these companies not just to thrive, but even survive, is to bake in regtech to their core business – to premise their operations on being compliant and keeping customers safe.
This will mean that the industry we rebuild after the crisis can effectively tackle corruption. We would have a financial system that’s better for the consumers who drive it, and more legitimately profitable for businesses.