The RegTech drive and investment powering industry growth

The ‘new normal’ for business sees professionals combine days working from home with days in an office. This change is giving new impetus, and importance, to digital transformation initiatives.

Characterised by tasks combining clerical and knowledge work with handover between tasks achieved ad-hoc via electronic communications, long-established operating processes are proving inadequate for this ‘new normal.’ 

The need to modernize, and equip teams and individuals to work as productively beyond the office as within it, is driving investment in digital platforms. Delivered as software-as-a-service from the cloud, these platforms mean location is no barrier to productivity and success.

Until recently, digital transformation programmes have bypassed the operations teams responsible for ensuring compliance with regulations. Why is this? An explanation could be that, while compliance is a necessary cost of doing business in regulated sectors, it can be viewed by executives who steer the revenue engines of their firms as a sinkhole consuming ever greater resources but contributing little to their growth agendas.

For several years now, those responsible for upholding regulatory compliance across industries have regarded and promoted RegTech as a tool that allows firms to build compliance cultures and improve operational performance. These bodies include the Commodity Futures Trading Commission in the US, the Financial Conduct Authority (FCA) in the UK, the Monetary Authority of Singapore, and the Australian Securities and Investments Commission. 

Looking at the impact of RegTech specifically, partnering with the City of London Corporation, RegTech Associates undertook analysis in their report 2021: A Critical Year for RegTech, assessing the annual cost of financial crime compliance in the UK as $49.5bn, while estimating that RegTech could save at least 0.05% of total compliance costs.

On the upward trend in investment that we are seeing in the sector, in Pulse of FinTech H2 2020, a KPMG report, it was said that “interest in regtech solutions skyrocketed as companies working to digitize processes quickly to support shifting business and consumer demands looked for efficient and cost-effective ways to manage their regulatory requirements in a shifted business environment. This growing interest drove regtech funding to US$10.6 billion, well above the previous high of US$6.5 billion seen in 2018”. 

In recent months several privately-held vendors have also announced significant investment in their companies, including Encompass, after securing new investment from Beacon Equity Partners, a Boston-based private equity group.

We should expect that digital platforms reset the economics of compliance. A challenge for RegTech vendors aspiring to be viewed as peers to other technologies underpinning broad digital transformation is to convince executives managing business teams that their digital platform makes a significant recurring contribution to their firm’s growth.