A : Overview of Regtech

Regtech :

RegTech refers to extensive use of information technology for enhancement and management of regulatory and compliance processes and ensure risk management protocols are in place

The main functions of RegTech include regulatory monitoring, reporting, and compliance

RegTech companies generally use cloud computing technology through software-as-a-service to help businesses comply with regulations efficiently and less expensive

The objective of RegTech is to enhance efficiency, transparency, consistency and standardise regulatory processes, to deliver sound interpretations of ambiguous regulations and provide higher levels of quality at lower cost

RegTech solutions have become a game-changer for financial institutions in managing compliance risks with the increasing complexity of regulations.

Fintech :

FinTech is looking at innovative solutions, typically for consumers, in the little gaps left by financial services organizations, banks or insurance businesses. Fintech can also cater to financial institutions or regulatory agencies looking to streamline or even diversify their operations.

The growth of FinTech companies has led to the emergence of RegTech solutions to help financial institutions comply with regulatory requirements. The regulatory compliance requirements for financial institutions are numerous and complex, and failure to comply with them can result in significant risk of non-compliance, financial and reputational damage

Sup Tech

‘RegTech for regulators’, versions of which are often called supervisory tech, or ‘SupTech

Suptech is technology designed to automate, manage, and improve oversight operations

It helps the regulators themselves keep track of the rules and how well FIs are following them.

SupTech is often seen as kind of a sub-category of RegTech. Example: Reserve Bank of India (RBI), The Swiss Financial Market Supervisory Authority (FINMA), the Monetary Authority of Singapore (MAS)

B. Solutions offered by Tech Stack :

Compliance and Risk professionals are responsible for determining firms’ regulatory framework and maintain them

• Regulatory content tools are situated at the beginning of the compliance process. They typically take the form of a content library, feed, or resource center. Content tools consolidate documents published by regulators into one platform (including the laws, enforcement actions, guidance, rule updates, and more), making research and horizon scanning more efficient. Leaders in this space include Thomson Reuters Regulatory Intelligence, LexisNexis and Reg-Room

• Regulatory knowledge automation is technology that bridges the gap between the raw data of regulatory content and actionable insight. They generates the regulatory obligations that pertain to your specific firm based on key factors like what type of financial entity you are, what services/products you offer, where you operate and then automatically updates your obligations as rules change. Leaders in this space include Ascent

This targeted regulatory knowledge allows compliance personnel to know exactly what the firm must comply with at all times, without the manual effort

• GRC (governance, risk and compliance) platforms help operationalize compliance and often house all of a firm’s regulatory information, including obligations, controls, policies and procedures. Workflow capabilities allow users to track and manage their compliance efforts. Leaders in the space include LogicGate, MetricStream, IBM OpenPages, and RSA Archer to name a few

• Point solutions cover a wide swath of RegTechs, helping firms execute compliance in a compliant way or assess compliance with an obligation or control. These could include trade monitoring, portfolio risk, know-your-customer, anti-money laundering, operations risk management, and cybersecurity tools

Point solutions are more limited in scope than regulatory knowledge automation or GRC solutions, but when they meet the right need they can provide substantial value

C. Areas of Support / Categories of RegTech

1. Compliance

Machine learning and AI Algorithms help to ensure compliance by automating processing like searching for new or changed regulations, reporting, data analysis, sharing the impact of changes. AI algorithms monitor and track the current state of compliance and regulations in real time

2. Customer Signing up, Identity management and control

This include Know Your Customer (KYC) processes through use of AI and machine learning to gather necessary info from multiple source and analyze them which were earlier performed manually and help in proper verification of customer’s assets and finances will help you detect any frauds or threats.

3. Risk management

Systems and algorithms monitor risk by identifying situations based on delivered data. predict market changes and mitigate risks. It allows detecting compliance and regulatory risks, assessing risk exposure and anticipating future threats.

Once you have extensive knowledge of types of frauds and their mechanisms, you will be able to write detection logic and use machine learning to discover those patterns and detect them.

4. Case Management and Regulatory reporting

When regulations are not being followed this is where reporting intervene. Once you have enough information about the detected suspicious activity and you can prove a breach you have to report it to the regulatory authorities. Regtech can aid in the reporting process by automating it without the need of involving employees and eliminate or limit human errors.

The regulatory reporting processes which can be optimized by using AI, big data analytics, cloud solutions include a. regulatory change management, b. data validation, c. data processing and preparation, d. categorization and classification e. analytical calculations

5. Transaction monitoring

Real Time monitoring of transactions that go through banks, online shops or other financial institutions. This helps to identify potentially suspicious activities and flag illegal ones.

Robotic Process Automation can help to analyze and monitor transactions faster and more accurately than any separate department by leveraging the benefits of distributed information through Blockchain technology, cloud computing and big data

6. Money Laundering Detection and Anti Money Laundering (AML) Compliance:

Investigating and reporting on suspected money laundering in line with financial regulations takes a lot of time and information. Regtech for AML can make this process faster and thorough by detecting criteria commonly associated with money laundering in events, weeding out false positives, and automatically gathering all data necessary for proper AML investigating and reporting

7. Fraud Prevention and Anti-Fraud Compliance: Fraud comes in many different forms, with fraudsters coming up with new fraudulent schemes every time. So Regtech solutions that can act in real time is critical —not only to recognize and block known fraud attempts but also to identify successful new fraud attacks so they can be properly investigated and reported on. This helps FIs limit the damage they take from fraud, avoid non-compliance penalties from financial regulators, and maintain the trust of their customers

8. Regulatory Auditing and Change Management: Financial regulations change often, usually mandating that areas not covered as comprehensively before being more strictly monitored. Regtech is critical in assessing an FI’s current compliance situation, alerting FIs to updated rules, and helping compliance teams implement necessary changes within given time limits.

D. Technology used to blend power of digital transformation in regulatory compliance

i. Machine learning (ML)

ii. Artificial Intelligence (AI)

iii. Blockchain

iv. Natural language processing,

v. Robotic Process Automation

vi. Cloud Computing and Cloud Services

vii. Other emerging technologies

Machine learning (ML) is the application of algorithms that improve automatically through experience. Rather than being specifically programmed to complete a task, ML models are fed large amounts of data, which they use to learn and improve on their own. In regulatory compliance, ML models can process large amounts of regulatory data and gradually draw conclusions about that data, becoming more and more accurate over time.

Artificial Intelligence (AI) : Generative and other emerging forms of AI are technology that enables machines to learn from data and make decisions. AI uses various techniques such as machine learning, natural language processing, and computer vision to analyze data and make predictions. AI has transformed the financial industry by enhancing security, reducing costs, and improving customer experience

Blockchain is a digital record of transactions, most often associated with cryptocurrencies. Blockchain has many other purposes however, such as enabling the secure sharing of know-your-customer data within or between organizations for compliance purposes.

Natural language processing (NLP) is the field of using computers to process and analyze human language. In compliance, NLP can parse the unstructured raw text of regulation and reorganize it or otherwise transform it so that people can retrieve meaningful insights.

Robotic process automation (RPA) allows users to configure metaphorical “robots” or “digital workers” to replicate the actions of a human in a digital environment in order to complete a business process. RPA tools can automate laborious manual processes, like the production of hundreds of disclosures that asset management firms are required to generate throughout the year.

Cloud Computing and Cloud Services : Cloud computing is the delivery of computing services—including servers, storage, databases, networking, software, analytics, and intelligence—over the internet (“the cloud”) to offer faster innovation, flexible resources, and economies of scale. Typically anyone pay only for cloud services they use, helping them lower your operating costs, run infrastructure more efficiently, and scale as business needs change.

E. Benefits for Financial Services

1. Better customer experience

With the right RegTech tools, one can help drive significantly improved customer experiences. Whether it is with artificial intelligence (AI) or machine learning, RegTech solutions give you robust fraud detection tools and more seamless transaction experiences.

2. Scaling solutions

Ability to utilize sustainable and cross-border and scalable solutions, without sacrificing overall quality. These tools give flexibility and pathways for growth, and it allows move away from rigid enterprise risk management systems

3. Detect market abuse

Many firms rightfully fear that regulators have more information than their compliance teams, and being the last to know about market abuse among employees is a genuine and justified concern among firm

4. Efficiency gains — As regulation continues to grow, it becomes nearly impossible for compliance personnel to keep up without the aid of technology. Technology, capable of processing a high volume of data at incredible speeds, can quickly parse and analyze raw legal text and extract valuable insights.

5. Cost Optimization — By leveraging Regtech solutions, cost of compliance can be reduced to great extent which otherwise would require an army of resources to manage and moitor the regulatory monitoring, compliance and reporting norms

6. Greater accuracy and comprehensiveness — Manual, siloed processes tend to create gaps in the compliance operation, leading to human error and increased exposure. Implementing the right technology (integrating those technologies thoughtfully where necessary) shores up gaps and creates a streamlined compliance process.

7. Greater internal alignment — Technology tools enable greater transparency throughout the business, connecting once siloed people and processes. The result is better insights between business units that can be shared faster, which also leads to a stronger culture of compliance.

8. Improved risk management — Many RegTech tools help protect against various types of risk, including market abuse, cyber attacks, and fraud, by monitoring systems and alerting personnel to suspicious activity.

9. Alerted to new or changes to existing rules – Teams be directed to newer or changes in rules and the exact parts of their internal controls that are impacted so team members can make the appropriate changes

10. Streamline marketing review workflows

Regulators around the world are cracking down on marketing practices by financial services firms, with an emphasis on performance marketing and a focus on companies that market themselves inappropriately.

11. Management of third-party cyber risk

Cybersecurity continues to be a regulatory focus area, and third-party vendors remain a significant risk to the firms that they work with. Often overlooked way to risk-minimize is to perform ongoing and detailed due diligence on the vendors you work with. Doing so will reduce burden, risks, and costs associated with doing business.

12. Recording and Reporting - RegTech easily produce records of their compliance activities and generate useful reporting dashboards and insights on real time basis

F. Market Size

The global Regtech market size is estimated at $12.4 billion US in 2023, and is expected to grow to $30.4 billion US by 2027 (CAGR of ~14%)

Main drivers behind that growth include increased costs of compliance, lower entry barriers with SaaS-based offerings, a rising need for faster transactions and a regulatory sandbox approach to support RegTech innovations.

Machine Learning, Artificial Intelligence and blockchain all provide growth opportunities

Emergence of RegTech into the non-finance sector offers additional revenue streams for vendors in the market

Virtual currencies continue to be a hot topic for regulators, as their lack of current standards makes them ripe for fraud and money laundering. We’re also seeing more Fintech firms investing in environmental, social, and governance (ESG) applications. These may require different kinds of regulations than traditional financial use cases.

G : General Data Protection Regulation – GDPR and REGTECH

25 May 2018 enacted GDPR in Europe. This GDPR regulations contains 99 articles from its preceding Data Privacy Law of 1995 and many new privacy requirements:

i. Businesses should take explicit consent from users before collecting their data.

ii. Data protection by design and by default

iii. All users should have access to their data.

iv. Every user should have the right to data portability.

v. Every user should have the right to be forgotten.

vi. Strict implementation of the rules

vii. Businesses should inform customers in case if data has been breached.

Rights of End-User

1. The Rights to be Informed

2. The Right to Access

3. The Right of Rectification

4. The Right to Erasure

5. The Right to Restrict Processing

6. The Right to Data Portability

7. The Right to Object

8. Rights in Relation to Automated Decision Making and Profiling

Challenges for organizations to comply with GDPR

• Rapidly increasing security breaches and big corporations collecting excessive data about users have become a significant concern for average users and governments.

• While the GDPR helps prevent security breaches and give users more power over their own data, it may be challenging for businesses to make application GDPR compliant

• The GDPR applies to web and mobile applications that collect personal data of people living in Europe. Even if your business doesn’t exist in Europe, but you are collecting information from people in Europe, GDPR will still apply. Failure to comply with this legislation could result in severe penalties.

Applicable of GDPR for INDIA

• On August 11, 2023, India's long-awaited general personal data protection legislation, the Digital Personal Data Protection Act, 2023 (“DPDPA”) was finally enacted

• While GDPR requires international data transfers to take place pursuant to additional safeguards, the DPDPA does not currently specify additional measures to be followed for international data transfers, although these may be set out subsequently in further regulations and the Indian government may also specify jurisdictions to which data cannot be transferred

Can RegTech help for specific regulation like GDPR?

These regulations have added necessary protection for consumer on one hand and on the other hand have increased financial institutions’ already significant regulatory burden in the process :

• There are many point solutions that help firms execute GDPR-compliant behavior.

• To understand what any organization’s obligations are under GDPR, look to regulatory knowledge tools which are AI-driven technology and pinpoints the GDPR obligations that your firm must comply with, then updates them automatically if the rules change

H Prevention of Money Laundering Act, 2002 (PMLA) and REGTECH

Key Objectives of the PMLA

1. Prevent money-laundering.

2. Combat/prevent channelising of money into illegal activities and economic crimes.

3. Provide for confiscating property derived from, or involved/used in, money laundering.

4. Penalise the offenders of money laundering offences.

5. Appointing an adjudicating authority and appellate tribunal for taking charge of money laundering matters.

6. Provide for matters connected and incidental to the acts of money laundering

Common Forms of Money Laundering

• Hawala

• Bulk cash smuggling

• Fictional loans

• Cash-intensive businesses

• Round-tripping

• Trade-based laundering

• Shell companies and trusts

• Real estate

• Gambling

• Fake invoicing

Money Laundering Offences and offenders

A person shall be guilty of the offence of money laundering when, he/she has directly or indirectly attempted to indulge, knowingly assisted, knowingly is a party, or is actually involved in one or more of the following processes or activities connected with proceeds of crime:

• Concealment

• Possession

• Acquisition

• Use

• Projecting as untainted property

• Claiming as untainted property

Method of Operation

• Placement : The first stage is when the money derived through crime is introduced into the formal financial system called ‘placement‘.

• Layering : In the second stage, the money so introduced into the system is layered and spread over various transactions with a view to clear the tainted origin of the money and is called ‘layering‘.

• Integration : In the third and the final stage, the money enters the financial system in such a way that original association with the crime is sought to be cleared so that the money can then be used by the offender or person receiving it as clean money and this is called ‘integration‘.

Authorities

• The Enforcement Directorate in the Department of Revenue, Ministry of Finance, the Government of India is responsible for investigating the offences of money laundering under the PMLA.

• Financial Intelligence Unit – India (FIU-IND) under the Department of Revenue, Ministry of Finance is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister. FIU-IND is the central national agency responsible for receiving, processing, analysing, and disseminating the information relating to suspect financial transactions

• Central Government has the power to appoint an adjudicating authority

Obligation of the Banks, FIs and Intermediaries

• To maintain records of every transaction and amount, whether such transactions were one off or series of transactions having an internal connection with each other when such series occurred within thirty days.

• To inform the Director appointed under PMLA about such transactions within the allotted time.

• To verify the identity of the clients.

• To keep a record of all documents relating to the identity of clients and the beneficial owners, account files and business transactions relating to clients.

• These records must be kept for 5 years from the time the transaction took place

I. Importance and Way Forward for RegTech

Importance of RegTech in Fighting Financial Crimes

• The use of technology has brought about new ways of committing financial crimes, and as such, there is a need for advanced technology solutions to tackle this problem.

• Money laundering, terrorism financing, and corruption are a few examples of financial crimes committed through financial systems worldwide impacting stability of financial systems but also the global economy as a whole.

• Financial institutions are responsible for ensuring that their systems are secure and that they comply with relevant laws and regulations

• Anti Money Laundering : This software uses advanced algorithms and machine learning techniques to monitor transactions and identify patterns that are indicative of money laundering.

• monitors transactions your customer make in real-time to detect suspicious transactions

• set rules and create scenarios with the rule-writing feature. It'll help you reduce false positive alarms, focus on correct warnings, and reduce your workload.

• Quickly Respond to Suspicious Transactions with Real-Time Alarms by their risk levels (1-5)

• Ready-to-use rule sets compatible with each sector. You can also create different rule sets specific to your customer group.

• Determine customers' risk scores and define alarms - Test Rules with Advanced Sandbox Test Environment

• Analyze the accounts trade with each other using the Transaction Analysis feature and view the Account Name, Volume, Balances, and relation of each account

By transitioning to digital technology, an entrepreneur can ensure compliance without any lapses, delays, or defaults. Intelligent and automated compliance management can empower organisations to maintain a perpetual state of vigilance and consciousness. It is imperative for organisations to implement intelligent and automated compliance solutions that offer improved oversight and visibility of compliance operations.

It not only facilitates enhanced visibility and control over compliance functions but also empowers entrepreneurs to maintain a competitive edge. Digital compliance boasts distinctive attributes, including personalised checklists, real-time regulatory updates, automated alerts and reminders, and periodic analytics.

With the help of technology such as special compliance platforms, companies are able to easily research their customers and ensure that they are not doing illegitimate business or business with criminals. Hence with adoption of technology, increasing need for identifications, monitoring, compliance and reporting, Regtech industry is sure to grow and prosper

First, technology will play a growing role in compliance efforts and will compel further investments in data quality, information systems, and related hiring. Technology is advancing, creating new opportunities for digitization, monitoring, and reporting. At the same time, financial institutions face an array of regulations related to capital, risk management, consumer protection, and transparency that are unlikely to be repealed any time soon.

Second, the effects of RegTech investments will not be confined to compliance functions. Instead, because data can be shared within an organization, compliance-driven improvements in data quality and availability will influence the adoption of complementary tools (such as the customer relationship management programs we study), which in turn have important effects on financial service quality.

Overall, RegTech has the potential to alter the quality and nature of financial services, not only in the Broker-Dealer market we study, but also banking, insurance, and asset management.