Tuesday, 3 December 2024
by Achille Deodato, CEO at Indigita SA
In an environment of constant regulatory changes and thriving digitisation, the financial sector is in constant evolution, compelled to innovate and adapt. At the heart of this evolution, digital compliance plays a key role by using process and control automation to improve accuracy, reduce costs, and enhance efficiency.
Digital compliance encompasses automated processes designed to ensure that financial activities comply with applicable legislation.
The benefits of this automation are evident—enhanced control accuracy, cost reduction, and improved operational efficiency. However, the challenges are significant, particularly in terms of the proper coding of rules and their effective integration into automated systems, an area where RegTechs emerge as a crucial solution.
Building upon this foundation, RegTechs, similar to FinTechs but focused on compliance, specialize in the digitization and automation of regulatory processes. Their expansion is driven by rising compliance costs and increasing regulatory complexity. In its 2021 paper called "Analysis of RegTech in the EU Financial Sector," the European Banking Authority (EBA) reveals that the adoption of RegTech solutions in the EU financial sector has significantly increased since 2008, with global investments reaching 11 billion euros in 2021, demonstrating strong resilience compared to other FinTech segments.
Although RegTechs excel in environments where data is abundant and regulations are clearly defined, they face limitations in situations requiring nuanced interpretation or deep reflection, where human judgment is indispensable.
The major challenges of automation lie in the parameterization of controls, i.e., transforming regulatory requirements into programmable rules.
There often exists a gap between compliance experts, who understand the regulations, and IT specialists, who have the technical skills to implement them. Genuine RegTechs bridge this gap, ensuring that automated systems operate efficiently while complying with complex legal standards.
One practical implementation of RegTech is seen in digital training platforms. These platforms automate the process of ensuring that employees receive and complete mandatory compliance education, customizing training programs to individual needs and automatically assessing completion and understanding. This innovation significantly streamlines what was once a cumbersome and manual process.
Further extending its reach, automation through RegTech is highly effective in transaction monitoring systems. These systems continuously scan financial transactions in real-time to detect patterns of suspicious activity and automatically report potential breaches of anti-money laundering (AML) regulations without human intervention. This capability not only enhances the speed and accuracy of monitoring but also reduces the workload of compliance staff.
Moreover, the automation of client portfolio reviews for suitability and tax compliance has been revolutionized by automated tools. These tools assess and adjust portfolios based on predefined criteria and regulations, aiding financial advisors in ensuring that investment recommendations meet both regulatory standards and the individual financial goals and tax circumstances of their clients, thereby safeguarding both the client and the institution against compliance risks.
Looking forward, the future of digital compliance and RegTechs appears promising, driven by advances in artificial intelligence and machine learning that could further enhance the precision and efficiency of compliance technologies. However, maintaining a judicious balance between automated solutions and human expertise is crucial. As the financial landscape continues to evolve, navigating this complex regulatory environment will require a blend of technological innovation and human discernment. The RegTech revolution is redefining financial compliance, envisioning a future where technology and regulation work together to create a more efficient and better-regulated financial environment.
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