Regulatory technology (“regtech”), a subset of financial technology (well known as “fintech”), seeks to achieve better regulatory outcomes through the use of technology. Regtech has been used by financial institutions for decades; for example, WorldCheck, a well-known tool used to screen customers. In recent years, regtech gained increasing traction among financial institutions for the efficiency and effectiveness that it brings to financial services businesses.

Recognised Advantages of Regtech

Regtech provides distinct advantages. In addition to being more efficient, it allows for more consistent processing and also for more sophisticated analysis due to the amounts of data that can be automatically processed. As a result, financial institutions are implementing regtech and even developing their own regtech, by themselves or in collaboration with regtech companies or other specialists.

Regulators also recognise the benefits of regtech. For example, the Monetary Authority of Singapore (“MAS”) recently endorsed the use of technology for pre- and post-trade checks: “[Manual processes and data manipulation make] such checks labour-intensive, time-consuming, and highly susceptible to human errors. MAS encourages [private banks] to explore the use of technology and data analytics to automate and process data in a more efficient way that will reduce errors and ease resource constraints.”[1]

Challenges for Small Financial Institutions

Small financial institutions, such as external asset managers (“EAMs”) or hedge fund managers, however struggle in utilising of regtech. Although a range of regtech systems are ready for use, a great number of them require expertise for additional calibration to be of full use, for example the definition of rules in transactions monitoring. More crucially, regtech systems are often expensive. Regtech solutions are expensive to develop and deliver their full potential when applied to scale. As a result, their prices are geared to producing cost efficiencies when used at scale. Conversely, small financial institutions commonly operate at small volumes. For example, an EAM on-boards one to two new clients every two months, not fifty or a hundred clients per day and its clients have four or five incoming or outgoing transactions per month, not thousands. A hedge fund manager has ten or fifteen staff whose fit and proper status must be ascertained, personal transactions must be monitored and who require training. Because small financial institutions cannot profit from the economies of scale of regtech, the cost prevents implementation and the analytical benefits of these solutions.

The Easy Solution

The most evident option for small financial institutions to implement regtech is to make use of ready-to-use systems. These regtech systems provide pre-configured analytics and are most often Software as a Service (“SaaS”) which saves the financial institution the efforts of IT implementation. Such ready-to-use regtech systems are frequently found for anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) screening. They allow the financial institution to automate specific steps in a larger process while the financial institution continues carrying out other steps manually. Increasingly, these ready-to-use regtech systems automate even entire processes or task management, for example the management of review cycles and the tracking of the expiry of documents in addition to AML/CFT screening.

Access to Advanced Regtech

At Ingenia, we are pursuing a second level of access to regtech for small financial institutions. We leverage our position as a specialised service provider in compliance to multiple small financial institutions for their benefit.

1. We identify the regtech solutions that allow smaller financial institutions to benefit from the economies of scale.
2. We operate these regtech tools on behalf of our clients applying our expertise to optimise results.

We select best-in-class solutions fitting the needs of smaller financial institutions from regtech providers that allow us to use their systems for our clients. One system at a time, we make sophisticated systems and their advanced capabilities available to the small financial institutions we service. For example, corporate structures of clients are verified through an advanced AML/CFT screening system, e-learning provides for on-going training and awareness of regulatory obligations, and a policy management system allows for the mapping of regulations to policies and procedures. At the same time, we apply our understanding of small financial institutions to tailor the systems to them. For example the trainings distributed through our e-learning system cover the various aspects staff in small financial institutions are confronted with, the policies managed in the policy management system are tailored to the lean structures of small businesses, and processes implemented throughout the systems generally fit small operations. Moreover, we operate the systems applying our expertise to gain efficiencies and to adapt the systems to current developments. Joining us on our journey for technological advancement our clients thus benefit from the best of many worlds: They reap the benefits of regtech in a way that is tailored to small financial institutions and applied by experts.

If you would like a greater discussion around automating compliance processes in your business and the type of grants you can rely on to digitize your processes, reach out and speak to us today.

[1] Information Paper on Private Banking Sales and Advisory Practices dated February 2020, p. 4.