Regtech & the Dis­rup­tion of Com­pli­ance

Silicon Luxembourg - - BUSINESS - Au­drey Baverel, a con­sul­tant ad­vis­ing star­tups, has a strong track record in cor­po­rate fi­nanc­ing and tax. In each is­sue of SIL­I­CON Mag­a­zine she clar­i­fies a con­cept rel­e­vant to the in­dus­try and you, the read­ers.

CON­TEXT

Scan­dals from pre­vi­ous fi­nan­cial crises pushed su­per­vi­sory bod­ies to in­crease reg­u­la­tions and rules within the fi­nan­cial sec­tor (e.g. Basel III, MIFID, KYC). With the dig­i­tal­iza­tion of our econ­omy, ad­di­tional con­cerns about data and pri­vacy pro­tec­tion emerged (i.e. GDPR and e-sig­na­ture), broad­en­ing the reg­u­la­tory im­pact beyond the fi­nan­cial sec­tor.

An ex­po­nen­tial in­crease in the amount of data com­pa­nies must process en­sures that the risk of non-com­pli­ance will get more and more sig­nif­i­cant with time.

The cost of reg­u­la­tory con­straints and po­ten­tial non-com­pli­ance penal­ties trig­gered a new need for agile risk man­age­ment and com­pli­ance so­lu­tions.

REGTECH & THE DIG­I­TAL­IZA­TION OF REG­U­LA­TORY FUNC­TIONS

Regtech fol­lows in the path of fin­tech and de­scribes in­no­va­tive com­pa­nies and ini­tia­tives that of­fer au­tom­a­tized and smart so­lu­tions in the risk-man­age­ment and com­pli­ance do­main.

From as­set-man­age­ment re­port­ing to risk car­tog­ra­phy, im­proved in-house doc­u­ment track­ing to au­tom­a­tized up­dates of reg­u­la­tory changes, regtech cov­ers a broad ar­ray of ser­vices that bring gains in terms of agility, speed and cost.

IN­NO­VA­TIVE TECH SO­LU­TIONS TO REG­U­LA­TORY CON­STRAINTS

Regtech re­lies on the de­vel­op­ment of tech­nolo­gies to suc­cess­fully com­ply with ever-chang­ing mar­ket needs – in­no­va­tions like ma­chine learn­ing & AI, big data, cryp­tog­ra­phy and blockchain.

For in­stance, au­ton­o­mous tech­nol­ogy so­lu­tions, such as big data or ma­chine learn­ing, which uses ar­ti­fi­cial in­tel­li­gence, pro­vide a deeper and more ac­cu­rate data anal­y­sis of com­pa­nies while de­vel­op­ing self-learn­ing and adap­tive ca­pac­i­ties. Ma­chine learn­ing is char­ac­ter­ized by an abil­ity to im­i­tate hu­man be­hav­ior through mod­el­ing good prac­tices and learn­ing from past mis­takes. For in­stance, those so­lu­tions are ap­plied in KYC and AML. A tech­no­log­i­cal so­lu­tion can now de­tect all in-house and le­gal rules/ di­rec­tives in a data­base with which com­pa­nies need to com­ply. Af­ter iden­ti­fi­ca­tion, the soft­ware can au­to­mat­i­cally carry out an in­spec­tion and trig­ger an alert in case of non­con­for­mity. This process is also used in hedge-fund su­per­vi­sion to sniff out rogue traders (as il­lus­trated dur­ing the re­cent ac­qui­si­tion of Sy­bene­tyx by Nas­daq).

REGTECH RE­CENTLY BE­CAME A TRENDY TERM COM­MONLY AS­SO­CI­ATED WITH THE FI­NAN­CIAL SEC­TOR. SUM­MITS, EVENTS, DIS­CUS­SIONS AND RE­PORTS AROUND THIS NEW FIELD ARE POP­PING UP EV­ERY­WHERE, IN­CLUD­ING IN LUX­EM­BOURG. BUT WHAT IS REG­U­LA­TORY TECH­NOL­OGY (REGTECH) ALL ABOUT? DOES IT ONLY IM­PACT BANKS AND FUNDS? LET'S TRY TO GET A BET­TER UN­DER­STAND­ING OF REGTECH AND HOW IT CRE­ATES POS­I­TIVE OP­POR­TU­NI­TIES FOR LUX­EM­BOURG.

The risk of non-com­pli­ance and the huge penal­ties as­so­ci­ated are also el­e­ments that drive com­pa­nies to regtech so­lu­tions. Adap­tive and global so­lu­tions (i.e. the au­to­matic ap­pli­ca­tion of lo­cal law and reg­u­la­tory changes in mul­ti­ple ju­ris­dic­tions) are highly valu­able in the world of com­pli­ance man­age­ment.

Many tasks were, un­til re­cently, man­u­ally man­aged and time con­sum­ing. Regtech so­lu­tions there­fore save com­pa­nies time and money.

WIN-WIN SIT­U­A­TION

With regtech, com­pli­ance and risk-man­age­ment func­tions are re­designed and opened up to new in­no­va­tive play­ers. Pre­vi­ously han­dled in le­gal and com­pli­ance de­part­ments, it can now be ex­ter­nal­ized to regtech in­no­va­tors that bring ef­fi­ciency, sav­ings and a new ex­pe­ri­ence to a do­main that was con­stantly viewed as a money pit.

Regtech play­ers are po­si­tioned at the junc­tion of reg­u­la­tory bod­ies, fi­nan­cial in­sti­tu­tions and in­no­va­tive tech­nol­ogy cen­ters. Their so­lu­tions man­age to sat­isfy mul­ti­ple needs and re­quire­ments:

Reg­u­la­tory bod­ies ac­com­plish their mis­sion to pro­tect cus­tomers

Fi­nan­cial in­sti­tu­tions, e-com­merce & other en­ti­ties that fall within the reg­u­la­tory scope re­ceive cost-sav­ing, in­no­va­tive so­lu­tions

Com­pa­nies must be will­ing to out­source func­tions in­volv­ing their sen­si­tive data in or­der for the regtech uni­verse to ex­pand and flour­ish. The suc­cess of regtech will ul­ti­mately hinge on its abil­ity to gain trust.

BIG OP­POR­TU­NI­TIES FOR LUX­EM­BOURG

The re­cently launched Lux­em­bourg House of Fi­nan­cial Tech­nol­ogy (LHOFT), a pub­lic-pri­vate sec­tor ini­tia­tive aim­ing to fos­ter in­no­va­tion and de­velop so­lu­tions, proves that Lux­em­bourg's fi­nan­cial com­mu­nity has big fin­tech/regtech am­bi­tions.

Lever­ag­ing lo­cal fund and bank­ing ex­pe­ri­ence, key e-com­merce play­ers and pub­lic-pri­vate ini­tia­tives, regtech ac­tors in Lux­em­bourg should find all the con­di­tions needed to suc­ceed. Promis­ing com­pa­nies (i.e. Snap­swap, Gov­er­nance.io, kyctech and KYC3) have al­ready emerged in this sec­tor and ex­panded into in­ter­na­tional mar­kets.

Let's hope that this is only the be­gin­ning for Lux­em­bourg.

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