Bank Regulation

RegTech's Effort To Ease The Cost Of Compliance

More than half of companies surveyed by SWIFT and Dow Jones Risk & Compliance last year said they plan to invest in RegTech in the coming years, and most agree that technology has enabled a greater ability to remain compliant with key regulations surrounding anti-money laundering, Know Your Customer and more.

But as is typically the case, larger enterprise may be better positioned to tackle the heightened pressures of regulatory compliance – and throw resources at innovative RegTech – than small businesses. New data from the Canadian Federation of Independent Business (CFIB) published this week found that regulation costs Canadian companies $36 billion every year (more than $26 billion USD).

In an article penned for Financial Post, Laura Jones, executive vice-president and chief strategic officer for the CFIB, emphasized the crushing weight of regulations on small business owners in particular. Half of entrepreneurs in the nation said they would warn their own children against starting their own companies because of the financial and emotional costs of regulatory compliance.

"The best analogy I've heard to describe the problem of regulatory accumulation is throwing pebbles in a river," wrote Jones. "The first pebble doesn't make much more than a ripple. Hundreds of thousands of pebbles later, you have dammed the river.

"If the river is the entrepreneurial energy and the activity that fuels economic growth, incomes and standards of living, that's not a good outcome."

Canada is far from the only market in which regulation is overwhelming to small firms.

In the U.S., the election of President Trump spurred a refocus on regulation for many of the nation's small businesses, anticipating changes to tax, health care, wage and other laws. In a survey by Paychex last year, 55 percent of small businesses said regulatory uncertainty and ambiguity is impacting their ability to grow.

In the U.K., overlapping and confusing rules about data protection and privacy from PSD2 and upcoming General Data Protection Regulation (GDPR) laws could lead to fines for some small businesses, according to Zurich's latest SME Risk Index report, which found that 85 percent of small businesses will be impacted in some way by GDPR, and yet 44 percent remain unaware of key requirements under the new law.

RegTech's Position

It's in this climate that a RegTech boom has sparked. According to Reuters reports in late 2016, Trump's election was a key driver of RegTech adoption.

“Change is itself a driver of RegTech adoption,” said chief executive of compliance startup Arachnys David Buxton in an interview with the publication. “Volatility creates opportunity for relatively nimble RegTech firms.”

Citing data from Celent, Reuters noted that financial companies alone will account for $72 billion in spend on RegTech companies by 2019, up from $50.1 billion in 2015.

Yet other data highlights the long path to automating compliance via solutions provided by these technology companies. Last month, new research from Cordium and Aite Group found that just 2 percent of capital markets companies have fully automated their compliance processes. Only 8 percent said they use formal metrics to assess the impact of non-compliance; 43 percent don't assess it whatsoever.

“Firms that are failing to take a proactive approach to monitoring and managing compliance are taking a big risk," said Doug Morgan, group chief executive at Cordium, in a statement. "While it’s entirely understandable that compliance professionals can be consumed managing their day-to-day workloads, firms should look to technology to enhance oversight and future-proof their programs.”

While the FinTech market certainly endures waves of hype (see: bitcoin), some analysts believe the excitement over RegTech is here to stay.

“It’s not just a Silicon Valley catchphrase; I think it’s real because there’s a pain point,” said Trulioo founder and CEO Stephen Ufford in a recent interview with PYMNTS. He added that RegTech tools can be especially beneficial to small businesses in the financial services space, which still have high compliance requirements but often lack the resources to invest in sophisticated compliance efforts.

But as regulatory requirements continue to evolve, change and burden SMBs, the RegTech market will have a lot on its plate to address the needs of smaller firms.

“Our argument is that you probably should have something in place to scale, but that’s not always in practice the easiest thing to do,” added Ufford. “Ripping out multibillion-dollar systems that have been put in place over decades is not the easiest thing to do, even if you want to.”

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