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Guardians of Wealth: How RegTech Protects Investors in the Digital Era

Tuesday, 30 January 2024

Monde Economique by Achille Deodato, CEO Indigita SA

"Regtech" has become indispensable in finance as it aids in compliance and cost reduction. Financial institutions are pursuing digitization while regulations are growing in complexity. Selecting the right financial products for each client is challenging due to investor categorization and the diversity of products. Regtech automates this process, ensuring compliance and investor protection. Ultimately, could Regtech open up to individual investors, providing transparency and autonomy, potentially revolutionizing investment?


Regtech has become a crucial player in the financial sector, at the core of financial compliance. But what exactly is Regtech?

A Regtech company specializes in regulatory technology, providing technological solutions and services to help businesses, particularly in finance and compliance sectors, efficiently meet their regulatory obligations. Regtech solutions often utilize software, data analysis, and automation to streamline regulatory compliance processes, reduce risks, and enhance transparency.


In recent years, the Regtech sector has garnered attention from private investors and venture capitalists due to its rapid growth. As banks and financial institutions embrace digitization, they aim to achieve two primary objectives: enhance internal controls and reduce regulatory compliance costs while improving client services.


Amidst this transition, the financial industry faces an ever-expanding web of regulations. The 2008 global financial crisis, triggered by the subprime crisis, led to a wave of new regulations aimed at protecting investors. In Europe and Switzerland, regulations such as MiFID II and the Financial Services Act significantly raised investor protection standards.


However, even years after the 2008 crisis, financial institutions still grapple with the challenge of selecting the right financial products for each client. This task has become even more complex for two main reasons. Firstly, financial institutions must accurately categorize investors, considering factors such as their financial knowledge and experience. This involves both quantitative and qualitative assessments of a client's investment understanding, which are then translated into systems and matrices to create clear categories that match the diverse range of financial products available.


Secondly, the market offers a vast array of financial products, and sometimes, information about them can be contradictory or lacking. For instance, when dealing with a client described as "conservative" with limited financial knowledge, suggesting an investment in European Union government bonds may seem like an easy choice.

However, making this decision is far from straightforward as it involves addressing numerous systemic and specific questions. Systemic questions relate to the institution's infrastructure and processes.

Does the bank or wealth manager have a robust mechanism to assess a client's investment knowledge? How are data collected, stored, and digitized? Have cross-border regulatory constraints been considered? What protective measures are in place to prevent inappropriate investments?


Specific questions pertain to the investment product itself. Does the institution have the necessary information to classify the fund as suitable for conservative investors? Can the fund be offered to clients domiciled in specific countries? Are there minimum investment requirements? Is the fund registered for distribution in the client's home country?


When multiplying these complex considerations across the vast range of investment products available, which can number in the hundreds of thousands or more, it becomes evident that automation is essential to effectively tackle this challenge.


This is where Regtech companies come into play. Many banks and basic banking system providers lack the regulatory and technological expertise needed to navigate this complex landscape. This has led to the rise of specialized Regtech companies, each equipped to handle specific aspects of the investment proposal process. Regtechs have become indispensable partners for financial institutions to ensure compliance, as any deviation from the rigorous protocol can result in legal consequences, including potentially high fines.


While Regtechs may not possess the glamour of consumer applications, their role behind the scenes in the financial industry is crucial. They ensure the smooth operation of mechanisms that protect and preserve the wealth of investors in our ever-evolving digital era.


Ultimately, could the world of Regtech open up to individual investors, granting them the power to control the compliance of the investments offered to them? This question warrants further exploration as regulatory technology evolves. With increasingly sophisticated Regtech tools, it is conceivable that individual investors may access in-depth information and analyses regarding the compliance of the investment products presented to them. This could enhance transparency and investor autonomy, enabling them to make informed decisions and better safeguard their financial interests. In the near future, Regtech may expand its scope to include a more investor-oriented dimension, offering a positive transformation opportunity in the investment world.

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