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Stand:updated on 21.01.2000 | Topic Fintechs Regtech

Regtech is an umbrella term that refers to the use of innovative technologies in order to fulfil and document regulatory requirements in a more effective and efficient way. Regtech is used in several areas, including compliance management, risk management, customer verification and fraud detection.

Regtech

Symbolfoto @ profit_image/stock.adobe.com Regtech

A wide range of players are now focusing on regtech. Global standard-setting bodies such as the Basel Committee on Banking Supervision (BCBS) and the European Supervisory Authorities (ESAs) are analysing the types, trends and implications of regtech and the technologies it is based on. For example, they are conducting market analyses to examine potential application areas and the ways in which regtech can be used.

When supervisory authorities use innovative technologies to fulfil their mandates, this is known as “suptech”. Combining regtech and suptech as and where appropriate could promote efficiency and effectiveness on both sides in the areas where the two meet.

Potential and advantages

Thanks to regtech applications, companies can automate manual (sub-) processes. This allows regulatory requirements to be met with greater precision and less effort in some circumstances. In addition to the aspects relating to automation, regtech can play a role in the digital transformation of oversight, management and support functions.

According to the Bank for International Settlements (BIS), there are opportunities and potential collective benefits in making greater use of regtech and suptech in the financial sector.

Examples of regtech applications:

Technologies used:

Regtech applications in the stricter sense often involve different types of innovative technologies. These technologies may be used individually or in combination with other technologies. Big data and artificial intelligence (BDAI) and machine learning methods are key technologies for regtech. Biometrics is another key technology in the area of regtech, and distributed ledger technology (DLT) could play a more important role in future, too. Application programming interfaces (APIs) and cloud computing may be used as well, although mainly for the purpose of establishing infrastructures.

Frequently asked Questions

Regtech: make or buy?

Supervised companies can either make regtech applications themselves or outsource the creation of regtech applications to another company. In such cases, however, as with any other outsourcing arrangement, ultimate responsibility remains with the outsourcing company’s management. The outsourcing company must also comply with the applicable supervisory requirements for outsourcing.

Potential risks when using regtech

As a result of their technical and procedural design, regtech applications may entail a wide range of risks that must be analysed and assessed on a case-by-case basis.

High-quality data is essential due to the significant extent to which certain regtech applications are data-driven. Shortcomings in the data basis can also lead to inadequate or erroneous conclusions. It is also important to ensure that the data used for analysis is the data that is relevant for the specific purpose – and not (just) the data that is easily available.

The acquisition of regtech can lead to additional risks due to concentration effects. Acquiring regtech applications from just a few or even one provider(s) entails concentration risks. There may even be systemic risks if key business processes are affected.

In the case of regtech (and other) outsourcing arrangements, companies must ensure that qualified staff who are familiar with the relevant applications are available in-house at all times in order to fulfil the requirements regarding proper business organisation. In addition, companies should take regtech applications into account in their risk management systems based on how significant they are.

There are also risks pertaining to data protection law, e.g. when pooling and analysing the data gathered from market participants while monitoring transactions.

Additional information

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