What is Regtech?

Regtech is becoming an increasingly common part of day-to-day operations in sectors across the UK business environment. For many companies, it is a vital part of their business process; one that they would not be able to operate without.

 But what is regulatory technology? This is a relatively new term, so where did it come from and what is it used for? Read on, and we will explain all things regtech.

What is regtech?

Regtech simply means any technology that helps companies meet their regulatory obligations. It is often considered to be a subsection of the larger fintech sector and is commonly found within organisations that provide financial services. Many regtech companies also offer other fintech services. 

Regtech aims to both help companies meet government regulations and operate legally, providing them with a way to do this as efficiently and conveniently as possible, with the least interruption to their business process.

Whilst regtech services exist for all manner of regulatory requirements there are currently two main sectors to the regtech market: financial regulations around banking and regulations around money laundering. 

Why is regtech needed?

The need for regtech in banking regulations is a product of governments around the world responding to the Global Financial Crisis. A lack of government oversight had allowed financial institutions to engage in predatory lending and extreme risk-taking, which created a financial bubble resulting in the most severe economic crisis since the Great Depression.

Following this, stringent regulation was introduced in almost every country to try to ensure that banks behaved responsibly and in an economically sustainable manner, such as the UK’s Financial Services (Banking Reform) Act 2013. Financial institutions required tech solutions to help them navigate and comply with these new pieces of legislation. 

As a result of this, one of the most common needs for regtech is in relation to compulsory anti-money laundering obligations for many businesses.

At the core of this is a global push to counter money laundering and the majority of regtech services used by businesses service this need. The extent of global money laundering began to be revealed within the last decade, with leaks such as the Panama Papers and work done by independent anti-corruption agencies. Governments around the world were no longer able to ignore the threat it posed, the industries that enabled it and the fact that current regulation was outdated and insufficient. 

In the UK alone £88 billion is laundered each year at a cost, whether direct or indirect, to the economy of £100 billion within that same space of time. The UK government has released numerous new laws surrounding anti-money laundering regulations that businesses must follow and these continue to develop. The UK is not alone in this and most governments across the globe have done the same. 

These regulations usually necessitate some form of technology simply to keep up with them. They are complicated, spread across multiple acts and carry severe punishment. For example, UK anti-money laundering compliance laws are spread across the following acts:

• The Proceeds of Crime Act 2002 (POCA) – These are some of the principal laws used in prosecuting money laundering. It aimed to formalise the criminality of money laundering and aid in the investigation into and recovery of dirty money and assets. Importantly, it makes it an offence for an individual operating in a regulated sector to fail to report suspicious activity. 

• The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR) – The other principal laws used to prosecute money laundering. This introduced changes to clients' due diligence and required professionals in regulated industries to take a risk-based approach to anti-money laundering. This was updated in 2020. 

• The Criminal Finances Act 2017 (CFA) – This act grants additional powers to authorities in the investigation of financial crimes and corruption (including money laundering) and to the recovery of ill-gotten gains.

• The Terrorism Act 2000 (TACT) – As well as introducing legislation in the investigation and prevention of terrorism, this added additional powers to authorities in combating the financing of terrorism.

• The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) – This allows the UK government the ability to introduce a wide range of sanctions, including financial sanctions against nations, organisations and individuals.

• The Terrorist Asset-Freezing etc Act 2010 (TAFA) – This grants HM Treasury the ability to freeze the assets of any individual suspected to be involved in terrorism.

These laws chiefly affect the regulated sector. Companies in the regulated sector are required to carry out stringent anti-money laundering checks on their clients and business partners. These checks not only involve confirming the individual’s identity but also investigating any known links to money laundering or crime around the world. 

If this process were to be done manually, each check would take even a specially trained member of staff days if not weeks to complete. With AML check software it takes seconds. As regtech companies specialise in compliance and constantly monitor the regulations for any changes, regtech tools also ensure that the checks companies are running are compliant with current standards.

Another increasingly common use for regulatory technology is to ensure that a company is not doing business with an individual that holds a sanction against them. The appetite for governments to declare sanctions against individuals and organisations has steadily been on the rise; as evidenced by the swathe declared in the wake of the Ukraine invasion. Regulatory tech allows companies to quickly and easily run an individual against every list of international sanctions.

How do I know if I need regtech?

Regardless of the industry a company is in or the regulations it operates under, it is the responsibility of the directors of that company to know their legal regulations to ensure they are operating in a compliant manner. As a general rule, their industry regulatory body is a good source of advice on regulatory matters.

If you are in the regulated sector then you are obligated to perform AML checks as part of a risk-based approach and this requires dedicated AML check software. The regulated sector is made up of:

• Art market participants (buying, selling or storing art worth €10,000 or more)
• Auditors & external accountants
• Casinos
• Credit institutions
• Estate agents
• Financial institutions
• High-value dealers (handling cash payments of over €10,000 or more)
• Independent legal professionals
• Insolvency practitioners
• Letting agents
• Trust or company service providers

What is the future for Regtech?

Demand for regtech is only set to increase in the future. Government regulations continue to become more numerous and stringent and companies will require technological solutions to navigate them.

Advances in technology, such as AI, big data and machine learning, will also allow companies to develop solutions to different regulatory needs and expand into new markets.

If your company does not currently use regulatory tech, there is a good chance that in the not-too-distant future, it will.

Red Flag Alert and Regtech

 Red Flag Alert has a broad product offering that includes a full suite of anti-money laundering and enhanced due diligence software for all your compliance needs.

Our fully digital AML/KYC platform offers:

• Time-saving and convenient EIDV software
• Fully compliant IDV, AML, PEPs, Sanctions and Adverse Media Checks
• Multi-bureau analysis offering unbeatable match rates
• Your client to complete a check from their device without having to download an app
• Bulk checking

Try Red Flag Alert today for free, and let us help you meet your compliance needs!