Aşağıda yayınladığımız yazılar, Özyeğin Üniversitesi, Financial Engineering and Risk Management (FERM) Yüksek Lisans Programında vermiş olduğum Financial Technologies dersinde öğrencilerimin bitirme ödevi olarak hazırladıkları çalışmalardan oluşmaktadır. Yazılar kendilerinden izin alınarak yayınlanmaktadır.

REGTECH AND THE COST OF COMPLIANCE

Hazırlayan: Sena Tekin

RegTech, which is defined as “the use of new technologies to solve regulatory and compliance requirements more effectively and efficiently” has enormous potential in the today’s world in which technology penetrates into every division of life. This is particularly promising in a sector with rapidly growing compliance costs, in which an uncertain macroeconomic and financial environment is putting pressure on the sector’s profitability. This report analyzes how new technology can be applied to improve compliance and regulatory reporting.

First of all, I would like to start with the question of “What is RegTech?” The lexical meaning of RegTech is the technology that addresses regulatory challenges and facilitates the delivery of compliance requirements. RegTech is a blend of ‘regulatory technology’ which was created to address regulatory challenges in financial services through innovative technology world. Regulatory technology was created to address challenges ranging from traditional compliance and risk management to data reporting and transmission, and much more. RegTech consists of a group of companies that use cloud computing technology through software-as-a-service (SaaS) to help businesses comply with regulations in an efficient and less costly way. Besides, RegTech is often slated as the growing sister of FinTech, which is the application of technology to improve the way we manage regulatory compliance. It also addresses a gap in a financial services market which is being disrupted at a rapid pace by FinTech. In a range of areas, dynamic FinTech has been driving a more efficient and more effective way of doing things. The extension of this disruption to regulatory practice is the next logical step.

We can expect this disruption to make regulation immensely data acquisitive and to include the use of real-time information, and the incorporation of algorithms and analytics. London is increasingly being seen as the home of RegTech with a range of leading global RegTech startups based in the capital.

It visualized “new approaches” to “streamline AML checks” (that would enable firms to differentiate themselves) and the use of social media and biometrics to transform how customer due diligence is done, how anti-fraud measures work and how banks “Filter the wheat from the chaff when deciding whether to make a suspicious activity report”.4

Actually, marriage of regulation and technology is not new. But it is getting more and more important as levels of regulation increase and focus on data and reporting rises. When we look back to the recent past, it’s clearly seen that the financial crisis in 2008 led to an increase in regulation in the financial sector all over the world. At the same time, there was a rise in the disruptive use of technology within the financial sector in the same year. Technology breakthroughs brought about a dramatic increase in the number of fintech companies which create technology-driven products to enhance the customer experience and engagement with financial institutions. The reliability on the consumer data to produce digital products has led to concerns among regulatory institutions, which can be governments, councils or agencies, calling for more laws on data privacy usage and distribution. The association of more regulatory measures and laws with a more technologized sector brought about the need for regulatory technology.

As of mid-2018, deregulation in the United States has led to retardation in RegTech company financing deals, despite the fact that the cost of compliance should still whip up the drive toward greater automation.

How Does RegTech Work?

After a brief introduction about “What RegTech is”, let’s mention the next question that comes in your minds in the second place which is “How RegTech works”. RegTech firms run their business in collaboration with the financial institutions and regulatory bodies, and make use of cloud computing and big data for the sharing of information. Cloud computing is a cost-efficient developing technology which has opened up new possibilities including the proficiency to share data quite rapidly and securely with a variety of entities. For instance, the banks which receive large amounts of data may find it too complex, high priced, and time-consuming to investigate in a deep way. Using devices such as predictive analytics, a RegTech company can compound the complex data that the bank has the information from former regulatory failures to estimate the potential risk areas which the bank should focus on cautiously. By compounding the analytics tools which are necessary for that kind of banks to be in successful conformity with the regulatory body, the RegTech corporation has saved the bank time and money. The bank also now has a remarkable tool to abide by the rules set out by financial authorities.

RegTech is an emerging association of tech companies which find a way out challenges which comes from a technology-driven economy through with automation. The emergence in digital products has raised the incidences of a data violation, cyber hacks, money laundering, and other counterfeit activities. With the use of big data and machine learning technology, RegTech helps to cut down the risk to company’s compliance departments by offering data on money laundering activities conducted online; activities which a traditional compliance team may not be privy to due to the extension in online underground marketplaces. RegTech devices look for monitoring transactions which take place online in real time with the aim of sorting out the issues or corruptions in the digital payment globe. Any outlier observed is relayed to the financial institution to analyze and conclude if fraudulent activity is taking place. Institutions that identify potential threats to financial security early on are able to minimize the risks and costs that are associated with lost funds and data violation.

RegTech Startups

When we look at the RegTech applications across the world, it can be seen that RegTech activities show up in various scopes of the financial and regulatory space. A number of projects which RegTech automatizes include employee observation, compliance data management, fraud prohibition, and audit trail capabilities. A RegTech company can’t just collaborate with any financial corporation or regulatory body as it may have different goals and strategies in place that differs from the other parties. For instance, a RegTech which seeks to determine the credit card fraud in the digital payments ecosystem may not discover it worthwhile to pair with an investment company that is concerned with its workers’ activities online or the SEC (Securities and Exchange Commission) whose current issue may be an increase in insider trading activities.

Some examples of RegTech companies that are disrupting the financial industry in a good way:

· IdentityMind: is a SaaS platform that builds and maintains regulatory technologies for ICO’s, crypto trading platforms and fintech companies. The company covers a wide range of RegTech tools, like fintech compliance platforms that screen customers and monitor transactions, and fraud prevention tools that digitally analyze each transaction to pinpoint any fraudulent outliers.5

· Chainalysis: Uses blockchain to stamp out money laundering, fraud and compliance violations in the cryptocurrency sector. The ledger-backed software helps financial institutions and crypto trading sites with Know Your Customer (KYC) and fraud prevention. The company also works with larger financial institutions and governments to warn about and deal with criminal activity. 5

· ComplyAdvantage: is an AI-driven risk management database for companies that can potentially be hurt by financial crime. The company’s proprietary Anti-Money Laundering (AML) data feed creates profiles, automates customer monitoring with KYC and due diligence tools and screens payments in real-time. The ComplyAdvantage platform is currently used by more than 350 companies in money-transferring industries, including payments, stock trading, and even gambling. 5

· Ascent RegTech: Ascent’s platform is built around “channels” that are derived from individual regulatory bodies. The company’s platform uses AI to find and house all applicable rules and regulations that affect a company in real-time. Consequently, Ascent users can use their personalized platform to quickly discover documents and regulations (from multiple regulatory agencies) that help maintain financial compliance.5

· Hummingbird: is an anti-money-laundering platform used by banks as well as fintech, lending, and credit companies. The software automates workflows, creates graphics and manages ongoing investigations for AML crime fighters so they can catch financial criminals sooner and on a wider scale. 5

· Continuity: is an on-demand portal for policy management and an auditing program for fintech companies and banks. The company’s compliance tools automate the regulatory lifecycle in everything from managing new regulations to calculating risk and devising compliance strategy. When we look at its industry impact, Continuity claims its product can reduce by 70% time spent interpreting financial regulations, and that its platform cuts compliance costs by more than half. 5

  • Trunomi: is a customer consent and data rights management platform. It ensures that financial sector customers sign consent receipts confirming that financial institutions can use and share their data. As a result, customers and banks can easily track the financial information to make sure that banks don’t abuse their sharing powers and customers don’t make fraudulent transactions. 5
  • BehavioSec: Uses behavioral biometrics software to predict and prevent problems caused by digital fraud. The company’s continuous digital authentications ensure that fraudulent practices, such as account takeover, malware, and compliance violations, are flagged before they become serious issues. BehavioSec was awarded three new patents for its Behavioral Biometrics Platform. All of the tools work to prevent account hijacking and fraud committed with stolen passwords and other identifiable credentials. 5
  • Taxometry: Simplifies the collection of sales tax, automating the entire process–separating the product price from sales tax at the moment of sale–sending the government its share and crediting the merchant’s account at the speed of light. Just like that. At the push of a button. 6

The Future of RegTech

I would like to conclude my article with mentioning on the effects of RegTech over the cost of compliance under the guidance of the article “RegTech: The revolution is coming” by Chris Steele.7 As mentioned at the beginning of the article, RegTech is a technology which helps financial services firms get better at dealing with regulation. It can strengthen compliance and reduce its costs, mitigate risks and increase efficiency.

Financial institutions have shelled out more than $300 billion in fines since the financial crisis according to Bloomberg. The cost of compliance spending is steadily increasing with up to 15% of firms’ staff working on governance, risk management, and compliance according to the Financial Times. RegTech has the potential to significantly reduce this figure by filling compliance gaps, reducing costs and detecting enterprise risks before the regulators. Regulatory constraints and low-interest rates have made it harder for financial institutions to generate consistent profit growth. Financial institutions’ need to reduce cost will see them embrace technology which enables them to increase efficiency and productivity in the risk and compliance function. As the cost of hardware and software comes down, investment in RegTech will become ever more affordable.


Bibliography:

§ https://www.mortgagefinancegazette.com/fintech/fca-seeks-views-technology-smarter-regulatory-reporting-21-02-2018/ 1

§ https://www.cbinsights.com/research/regtech-regulation-compliance-market-map/ 2

§ https://assets.kpmg/content/dam/kpmg/uk/pdf/2018/09/regtech-revolution-coming.pdf3

§ https://complyadvantage.com/blog/what-is-regtech/ 4

§ https://builtin.com/fintech/regtech-companies 5

§ http://www.taxometry.com/about.html 6

§ https://assets.kpmg/content/dam/kpmg/uk/pdf/2018/09/regtech-revolution-coming.pdf 7

§ https://home.kpmg/uk/en/home/insights/2018/09/regtech-revolution-coming.html

§ https://www.ascentregtech.com/blog/what-is-regtech/

§ https://www.investopedia.com/terms/r/regtech.asp

§ https://blogs.thomsonreuters.com/answerson/fintech-regtech-compliance/

This paper was prepared as a class work for Financial Technology course given by Prof. Selim YAZICI at Ozyegin University, Graduate School of Business, Financial Engineering and Risk Management Program.

İstanbul Üniversitesi, Siyasal Bilgiler Fakültesi, İşletme Bölümü öğretim üyesidir. Ayrıca, Marmara Üniversitesi, Bankacılık ve Sigortacılık Enstitüsü'nde, Sigortacılık Bölümü'nde 2009-2016 yılları arasında misafir öğretim üyesi olarak "E-Sigortacılık" dersini vermiştir. 2019 yılından beri misafir öğretim üyesi olarak Özyeğin Üniversitesi, Financial Engineering and Risk Management (FERM) Yüksek Lisans Programı'nda Financial Technologies dersini vermektedir. Teknolojiye ve teknolojinin yaratacağı fırsatlara inanmış bir akademisyen olarak, 2000'li yılların başında, teknolojideki değişimin finansal kuruluşların üretim, pazarlama, satış, dağıtım ve satış sonrası süreçlerinde yaratacağı etkileri ve e-ticaret olanaklarını değerlendiren araştırmalar yapmış ve sigortacılık sektörüne özel bir envanter oluşturmuştur. Bu çalışmaların sonuçlarını, ortak yazar olarak yer aldığı "Elektronik Sigortacılık" (2002) adlı kitabında yayınlamıştır. Daha sonra, finansal hizmetler dünyasındaki teknolojik değişimi ve müşterilerin dijitalleşmesini gözlemleyerek, özellikle bankacılık ve sigortacılık sektöründe dijital dönüşüme yönelik projeler geliştirmiştir. Teknolojinin finansal hizmetler sektöründe kullanımı ve çevik yapılar olan start-upların bu alandaki girişimcilik faaliyetlerini içeren FinTech ve InsurTech konuları ilgi alanını oluşturmaktadır. Girişimcilik, Finansal Teknolojiler, Dijital Sigortacılık, Proje Yönetimi, İş Sürekliliği Yönetimi, İşletme Yönetimi, Uluslararası İşletmecilik ve Örgütsel Davranış konularında dersler vermektedir. Finansal teknolojiler konusunda girişimcilerin ihtiyaç duyabileceği tüm alanları kapsayan ve ülkemizde ilk olarak FinTech İstanbul tarafından gerçekleştirilen "FinTech 101 Eğitim Programı"nın şekillenmesini sağlamıştır. Öğrenen Organizasyonlar (2001), Elektronik Sigortacılık (2002), E-Öğrenme (2004) ve İş Sürekliliği Yönetimi (2013) başlıklı yayınlanmış dört kitabı bulunmaktadır. TSEV ve TSPB'nin eğitmenlerinden olup bankalar ve sigorta şirketleri için çeşitli konularda eğitim programları düzenlemiştir.