Whilst lockdowns are being lifted in some parts of the world, few expect a return to pre-coronavirus norms. However, while work-life habits may have changed, in sectors such as FinTech working patterns were already much more flexible and fluid.
Indeed, in financial services more broadly, rapid and transformative change is constant and has been given fresh impetus by the pandemic. Notably, we’ve seen widespread adoption of advanced digital communication capabilities with sophisticated platforms,
not least content-rich company websites, which are now a necessity for even the most established players.
But in tandem with finance’s rapidly expanding digital footprint is a corresponding growth in regulation. And it’s clear too that regulators are imposing increasingly stringent and ever-evolving rules when it comes to digital promotion and record-keeping.
In fact, according to Deloitte, they are running at around 220 regulatory revisions a day.
Staying compliant with regulations such as MiFID II is, of course, non-negotiable. But whilst such rules aim to improve transparency, accountability and consumer protection, they also represent a huge technical challenge for many compliance departments.
This is especially true for newer, smaller firms with less in-house technical expertise.
The regulatory burden
To remind ourselves of this burden we just have to look to MiFID II, which requires all communications related to financial transactions to be recorded and stored for at least five years and in some cases for seven years. It covers communications with customers
by voice, video, instant messaging, website, social media, SMS and more – all need to be monitored.
And the cost of non-compliance is severe. Last year, the FCA imposed fines relating to transaction reporting and disclosure that totalled about £75 million – a sum that rises to about £160 million once misleading customers is taken into account. The overall
fines tally is higher still at £391.8 million, up from £60.4 million in 2018.
Thus far in 2020, the overall figure stands at £3.7 million – with COVID-19 probably helping to keep the lid on fines, at least for now. But with the UK thankfully past the peak of the virus, and MiFID II already under review, compliance pressures are bound
to further increase.
The good news, however, is that whilst technology is a catalyst for new regulation, it also offers a solution in the form of RegTech. But lest anyone be in any doubt, avoiding regulatory banana skins is no mean feat.
For example, if a FinTech firm undertakes a livestream on Facebook about the economic impact of the coronavirus crisis, is it clearly stated that the content isn’t financial advice? If a bank tweets information about how it oversees mortgage security during
the crisis, is the language clear enough without becoming misleading for a retail audience? And when it comes to investment updates, are firms fairly displaying their past performance record?
This is where and why RegTechs increasingly play a supporting role to FinTechs. And there are compelling reasons (and numbers) for this.
The bottom line
According to Refinitiv, the implementation cost of MiFID II has been estimated at around $2.5 billion, with ongoing annual compliance at $750 million. Meanwhile, compliance, risk management and governance account for up to 15% of the workforce in financial
So, it’s hardly surprising then that RegTech spending is on the rise. The twin drivers are firstly the regulation itself, and then trying to keep on top of the costs of compliance.
The solution to this new regulatory burden surely cannot be old fashioned ways of managing compliance. Technology has to be at the heart of a solution, which will present an opportunity for those firms that are already embracing technology. These businesses
have already embraced innovation and are generally in a better position to deal with such challenges.
That’s why I believe the RegTech sector is a fast-growing ally to the FS and FinTech sector – one that helps firms not just manage risks, but manage costs.
In other words, RegTech can be the partner that enables FinTech to remain not only compliant, but competitive.