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Why RegTech collaboration is key to solving financial crime

By Dr Henry Balani | Tue 1 November, 2022
Why RegTech collaboration is key to solving financial crime | Encompass blog

Financial crime is a rapidly evolving challenge to our global financial system. Regulators like the Financial Conduct Authority (FCA) in the UK recognize the need to impose penalties to correct non-compliance, with penalties surging by 65%, totaling more than £311M in 2021, as highlighted in their latest Annual Report.

Amidst this backdrop, what is less clear is the role that RegTech providers have to play in collaborating with industry peers to help combat what is a growing problem. Unlike FinTech, RegTech directly addresses regulatory policies established by government agencies. For example, when the major Western powers decided to sanction Russian companies and individuals, financial institutions (FIs) were required to implement procedures to flag these entities to ensure they were identified within their banking processes and to freeze and report on these entities as part of regulatory compliance obligations. Failure to do so can result in penalties or suspension of banking licenses.

Undoubtedly, technology is key to success. As such, it is important for RegTechs to collaborate with both regulators and FIs to address the most critical issues at play today in order to ensure effective implementation of sanctions policy.

The role of RegTechs

While arguably not as popular as FinTech historically (approx. 445M references in a Google search), RegTech (4M references) is expanding significantly and is key to addressing regulatory requirements through technological innovation. Financial innovation, while important to revenue growth, cannot be successful without RegTech solutions that ensure this growth meets regulatory compliance standards.

Banks need reliable, efficient, and predictable solutions to address compliance needs, and RegTechs are stepping up to provide that. However, the current challenge is that the RegTech market is fragmented, with different levels of maturity attempting to serve multiple regulatory needs across multiple jurisdictions. This is partially due to the ‘newness’ of RegTech and partly due to the rising use of regulatory drivers to address financial crime issues.

RegTech solutions address three key areas of compliance: Identification, reporting, and monitoring of financial transactions, adding greater complexity in delivering these solutions. The ‘newness’ of the industry as a whole means there needs to be greater outreach by RegTechs themselves to establish familiarity and trust in what they can offer.

Key amongst gaining this trust is the drive towards greater collaboration between the RegTech provider, the banks and the regulators. Building on these relationships will bring benefits for all: the RegTech provider benefits by reaching out to the market and providing solutions that fit their needs; the banks benefit from having greater awareness of the solutions available; and the regulator benefits from greater understanding of potential solutions that can help meet their regulatory compliance obligations.

Through collaboration, RegTech providers can also share techniques and technologies to improve standards of software delivery. While approaches can be proprietary, the underlying technologies (e.g. APIs, cloud computing, coding standards) can be standardized to allow for greater interoperability amongst developers.

Industry forums, conferences, and networking sessions are also excellent forums for collaboration that help drive standards forward. Having a common standard of software development and delivery will go a long way to increase trust and reliability in RegTech solutions, making purchasing decisions easier for banks, and ensuring that they have the necessary understanding of the solutions they see.

Navigating regulatory change

RegTech, by its definition, depends on regulations to drive this development. Today’s challenge is the number and frequency of regulatory updates across multiple jurisdictions, which makes the development and refinement of new and existing solutions much more challenging. Collaboration could be transformative here. A trade association/guild of RegTech providers could be created to monitor and distill important regulations that can impact development. This trade association could also work closely with regulators to demonstrate latest developments of the industry and provide a common voice to regulators to help drive policy making. Regulators are typically reluctant to meet with individual providers due to resource and other constraints but may be willing to meet with groups that are a collective voice for the industry. Ultimately, greater representation would provide greater trust in the industry.

Some innovative regulators, like the FCA, provide ‘sandboxes’ that allow RegTech providers to experiment in developing solutions prior to commercial release and, as we know, collaboration across key technology providers goes a long way towards development of an effective solution. Here, regulators provide the policy guidance, while various technology providers share different components of a solution. It is not uncommon for data providers to work closely with workflow and infrastructure providers to develop processes that address policy issues. Banks contribute by sharing their operational expertise and benefit by learning of successes (and failures) prior to making purchasing decisions. As a result, RegTech providers can better refine their solution and receive – implicitly or explicitly – endorsements from regulators to promote their solutions.

Collaboration and beneficial ownership

Collaboration is a critical element of today’s discussions around identifying Ultimate Beneficial Owners (UBOs) brought to light through the recent Pandora Papers scandal and Russian sanctions. The financial services industry now recognizes the challenges in identifying beneficial owners (BOs) as part of their regulatory compliance processes, and banks find that identifying the oligarch that owns sanctioned assets difficult as the true owner is disguised through the use of shell companies designed to obfuscate this ownership. Regulators continue to introduce new policies here. The Financial Action Task Force (FATF) is revising recommendation 24 to clarify ownership and reduce transparency of company BOs. In the US, FinCEN is looking to introduce a new federal BO register, while the UK government is revamping Companies House to improve accuracy and reliability of this company register and the EU is enhancing its Money Laundering Directive to clarify BO access and transparency. RegTech collaboration can play a crucial role in highlighting contributions from technology and policy level. Ongoing discussions have included input into improving international exchange of BO information and integration across multiple jurisdictional BO databases.

Collaboration in any industry has been proven, time and again, to drive better outcomes. When applied to financial services and the quest to reduce financial crime, its role becomes even more significant. Regulators, banks and RegTech providers are all looking to drive towards a common objective, and it is time to revisit the essence of collaboration to make financial services safe for all to use.


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Author: Dr Henry Balani

Dr. Henry Balani is Global Head of Industry and Regulatory Affairs at Encompass. He is a noted industry thought leader and commentator on Regulatory Compliance issues and trends affecting the financial services industry. As a published academic, Dr. Balani also lectures on international business, economics, and regulatory compliance courses globally. Dr. Balani holds a Doctorate in Business Administration from the University of Wisconsin, an M.B.A. from Northern Illinois University in the USA, and a B.S. in Economics from the London School of Economics.

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