EBA assesses benefits, challenges and risks of RegTech

The Report assesses the overall benefits and challenges faced by financial institutions and RegTech providers in the use of RegTech. It also identifies potential risks arising from RegTech solutions that supervisors will need to address and proposes actions designed to enhance knowledge and skills in competent authorities. These actions also aim to ensure technological neutrality in regulatory and supervisory approaches to RegTech, whilst addressing any inadvertent obstacles within the Single Market to facilitate the adoption of RegTech across the EU.
Key conclusions and the way forward

The EBA is committed to technological neutrality which requires constant monitoring and sharing of information on technological developments. The EBA Report looks at the application of technology-enabled innovation for regulatory, compliance and reporting requirements and provides a deep-dive analysis into the five most frequently used RegTech segments: Anti Money-Laundering/Countering the Financing of Terrorism (AML/CFT), fraud prevention, prudential reporting, ICT security and creditworthiness assessment. The deep-dive on RegTech for prudential reporting reflects findings identified in the EBA recent study on cost of compliance with supervisory reporting requirements (published here) which recommends wider use of technology and raising awareness of possible use cases for RegTech in supervisory reporting.

Financial institutions highlight enhanced risk management, better monitoring and sampling capabilities, and reduced human errors as the main benefits of use of RegTech solutions. RegTech providers emphasise the ability to increase efficiency, quell the impact of ongoing regulatory change and improve effectiveness.

The evidence suggests that the majority of challenges to RegTech market development are internal factors within financial institutions and RegTech providers. These relate to data (quality, security, privacy), interoperability and integration with the existing legacy systems, a lack of financial institutions’ application programming interface (API) capabilities, costly and often lengthy and complex due diligence processes, and limited awareness of RegTech solutions. The current legal and regulatory framework has not been identified as the most material obstacle for RegTech adoption. However, a lack of common regulatory standards across Member States could pose barriers for wider market adoption of RegTech solutions across the Single Market.

Building on the existing EBA’s, ESAs’ and CAs’ ongoing initiatives, the EBA proposes the following steps to be taken to support sound adoption and scale-up of RegTech solutions:

activities to deepen knowledge and address any skill gaps among regulators and supervisors on RegTech; support convergence of supervisory practices across the EU in the treatment of RegTech; and provide clarity on supervisory expectations;
further steps to harmonise the legal and regulatory requirements, where appropriate;
further leverage the role and expertise of the European Forum for Innovation Facilitators (EFIF) and the national regulatory sandboxes and innovation hubs as a safe testing environment for RegTech solutions.

In Q4 2021, the EBA will organise a public online webinar to present and discuss the main findings of the RegTech market analysis in the EU.
Legal basis and background

Article 31 of the EBA Founding Regulation Regulation (EU) No 1093/2010 mandates the Authority to promote supervisory convergence and facilitate entry into the market of actors or products relying on technological innovation, in particular through the exchange of information and best practices. The aim of this mandate is to ensure technological neutrality in regulatory and supervisory approaches to technology and contribute to the establishment of a common European approach towards technological innovation. The analysis of RegTech in the EU financial sector is designed to raise awareness on RegTech within the regulatory and supervisory community and inform any relevant future policy discussion.

The Report is based on information obtained via surveys and interviews with financial institutions, RegTech providers and competent authorities.