The evolution of Regulatory Technology (RegTech): Automating compliance to fight financial crimes – Olufemi Dada
For decades, financial institutions have grappled with the challenge of regulatory compliance, a task that has only grown more complex with the rise of sophisticated financial crime typologies.
Due to the interconnectedness and complex nature of the global financial sector, it has been an attractive target for illicit activities, from money laundering to terrorism financing, insider trading, and fraud amongst other financial crimes.
These acts have become rampant, prompting governments and regulatory bodies globally to impose stricter compliance measures.
Over the years, global organisations have relied solely on manual compliance mechanisms to track and keep up with the complexity of financial crime typologies.
The traditional methods are labour-intensive and time-consuming with the personnel struggling to keep pace with the sophistication and volume of financial crimes. However, with the impact of technological innovations and advancements over the years, the birth of Regulatory Technology (RegTech) has revolutionised the financial technology space with the development of solutions that help automate and enhance compliance processes, thereby fortifying the defence against financial crimes.
The term “RegTech” was first coined by the United Kingdom’s Financial Conduct Authority (FCA) in 2015, but the need for technology-driven compliance solutions pre-dates this recognition. According to the Chief Executive Officer of the Alliance for Innovative Regulation, Joanne Barefoot, “RegTech is not just an evolution of compliance. It is a necessary response to an environment where financial crimes evolve faster than regulations can keep up.”
The rise of RegTech can be traced back to the early 2000s when financial institutions began to recognise the limitations of traditional compliance methods. This regulatory burden, coupled with the increasing sophistication of financial criminals, created a fertile ground for technological intervention. Financial institutions and compliance professionals turned to automation, AI-driven monitoring, and blockchain verification to streamline compliance processes, giving birth to the RegTech industry.
Following the 2008 financial crisis, global regulators imposed tighter controls on financial institutions to prevent another systemic collapse. The cost of compliance skyrocketed, with financial institutions collectively spending over US$270 billion annually on regulatory obligations as of 2023, according to a report by Deloitte.
RegTech-driven solutions employ a suite of advanced technologies, including artificial intelligence (AI), machine learning, big data analytics, and cloud computing to enable real-time data processing and analysis, allowing financial institutions to monitor transactions, assess risks, and ensure compliance more effectively. The tech solution allows the use of artificial intelligence to sift through vast amounts of transaction data to identify patterns indicative of fraudulent activity, while its embedded machine-learning algorithms can adapt to emerging threats by learning from new data.
One of the key drivers behind the evolution of RegTech is the increasing volume of data that financial institutions manage. According to a report by CB Insights, financial institutions have raised over US$6.2 billion across approximately 680 equity investments since 2013 to develop RegTech solutions. These solutions range from software to automate workflow to advanced technologies like machine learning, natural language processing (NLP), and block chain. By leveraging these technologies, financial institutions can close compliance gaps, save on costs, and detect enterprise risks before regulators do.
The impact of RegTech on global financial crime prevention cannot be overemphasized. The Nasdaq Verafin 2024 Global Financial Crime Report revealed that an estimated US$3.1 trillion in illicit funds flowed through the global financial system in 2023, with money laundering accounting for trillions of dollars funding a range of destructive crimes. The report added that fraud, scams and bank fraud schemes totalled US$485.6B in projected losses globally in the year 2023. RegTech solutions play a crucial role in identifying these patterns, detecting suspicious activities, monitoring transactions in real time, and generating alerts for potential risks. These tools empower compliance professionals to stay ahead of emerging threats and proactively combat money laundering and other financial crimes.
For financial institutions, the adoption of RegTech is no longer optional. Rather, it has become a necessity. This is because non-compliance penalties to set regulations are harsh, with global banks having paid over US$400 billion in fines since the 2008 crisis for AML violations, KYC (Know-Your-Customer) breaches, and other regulatory lapses. In contrast, RegTech solutions help businesses stay compliant at a fraction of the cost.
Moreover, efficiency gains from automation allow financial institutions to reallocate resources from labour-intensive compliance tasks to strategic growth initiatives. According to the co-founder of the Global Open Finance Centre of Excellence, David Craig, “RegTech is not just about cost savings. It is about building a trust-based financial ecosystem where compliance and innovation co-exist.”
The future of RegTech looks promising, with the market for RegTech solutions projected to hit US$85.92 billion by the year 2032. This makes the trajectory of RegTech promising, pointing toward deeper integration within financial institutions’ operations. As global regulations continue to evolve, financial institutions must embrace innovative technologies to stay compliant and protect against financial crimes. By harnessing advanced technologies, RegTech offers a strategic edge, enabling institutions to meet compliance demands while scaling their businesses and safeguarding the integrity of the global financial system.
Olufemi Dada, a financial crime system analyst, writes the article.
