Regtech is becoming an increasingly common part of day-to-day operations for many sectors of the UK business environment. For many companies it is a vital part of their business process; one that they would not beable to operate without.
But what is regtech? Where did it come from and what isit used for? In this guide we will explain all things 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, fintech being technology that provides financial services, and many regtech companies also offer other fintech services.
The aim of regtech is to both help companies meet government regulations and operate in a legal manner, to let them do so in as fast and convenient manner 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.
The need for regtech around 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 who’s bursting created the most severe financial crisis since the Great Depression.
Following this, stringent regulation was introduced in almost every country to try to ensure that banks behaved in a responsible and economically sustainable way, such as the UK’s Financial Services (Banking Reform) Act 2013. Financial institutions required technological solutions to help them navigate and comply with these new pieces of legislation.
The most common need for regtech is in relation to companies’ anti-money laundering obligations.
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, and 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industries that enabled it and the fact that current regulation was outdated and insufficient.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 since released numerous new laws surrounding anti-money laundering regulations that business 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 sever punishment.
These are some of the principal laws used in prosecuting money laundering. Its aim was 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.
This grants additional powers to authorities in the investigation of financial crimes and corruption (including money laundering) and to the recovering of ill-gotten gains.
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 other principal laws used to prosecute money laundering. This introduced changes to client’s due diligence and requires professionals in regulated industries to take a risk based approach to anti-money laundering. This was updated in 2020.
This allows the UK government the ability to introduce a wide range of sanctions, including financial sanctions against nations, organisations and individuals.
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 sunning are compliant with current standards.
Another increasingly common use for regtech 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. Regtech allows companies to quickly and easily run an individual against every list of international sanctions.
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 and to ensure they or operating in a compliant manner.
As a general rule, their industry regulatory body are 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:
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 regtech, there is a good chance that in the not too distant future it will.
Red Flag Alert has a broad solution offering that includes a compliance solution that has a full suite of anti-money laundering and enhanced due diligence software for all your compliance needs.
Regtech is becoming the latest exciting development in the compliance management space, and Red Flag Alert is ideally placed to support businesses looking for a tech solution in this area.
Our compliance solution offers:
Always stay protected from regulatory fines, both domestically and internationally with the most robust compliance process possible.
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Red Flag Alert provides a comprehensive guide to adverse media screening, peps and sanctions. This is for those dealing with politically exposed people.
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