2021: a critical year for regtech - the global city · 2021. 4. 13. · 2021: a critical year for...

2021: A Critical Year for RegTech

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2021: A Critical Year for RegTech | 1

Contents

Foreword 2

Executive summary 3 Approach 4 Keyfindings 4 ChallengesfortheRegTechindustry 6

1 RegTechToday 10 1.1 Introduction 10 1.2 WhatisRegTech? 11 1.3 RegTech–understandingtheproblemsandsolutions 12 1.4 TheUKRegTechindustry 15 1.5 UKRegulatoryandPolicyContext 19 1.6 BenefitsofRegTech 24 1.7 ImportanceofRegTechtotheUKEconomy 26 1.8 Conclusion 26

2 KeyFindings 27 2.1 Overview 28 2.2 UKRegTechAdoption 28 2.3 UKRegTechSalesPerformance 32 2.4 BarrierstoAdoption 34 2.5 TheimpactofCOVID-19 41 2.6 RegTechDemandDrivers 46

3 TenKeyChallengesforUKRegTech 47 3.1 AddressingtheChallengesfacedbyUKRegTech 49

4 Recommendations&NextSteps 55 4.1 RecommendationsMatrix 56 4.2 GeneralRecommendations 57 4.3 RegulatoryRecommendations 59 4.4 VendorRecommendations 60 4.5 FinancialInstitutionsRecommendations 62

Appendix1–GlossaryofTerms 65 Appendix2–ResearchApproach 66 Appendix3–References 75

ResearchTeam 76 OtherInitiatives 76 Acknowledgements 76


Regulationisthecornerstoneofastableandsoundfinancialservicessector,andonewhichservestheinterestsofbothconsumersandinvestors.Now,morethanever,regulationpenetratestothecoreofallfinancialinstitutionswhethertheyfocusoninsurance,bankingorassetmanagement.

TheUKhaslongbeenrecognisedgloballyasathoughtleaderinfinancialregulation,soitisnosurprisethatboththeFinancialConductAuthorityandtheBankofEnglandhavebeenproactiveintheirapproachtotechnologyinnovation.

Aswelooktokickstartastrong,sustainablerecovery,technologicalinnovation,anareawhereLondonisalreadyleadingtheway,willbekey.Trendssuchasremoteworkinganddigitalisationhavetransformedhowwedobusinessmeaningdemandforinnovativesolutionswillcontinuetosurge,bringingopportunitiesforincreasedefficiency,moreeffectiveprocesses,andcost-savingsforbusiness.

TheCityofLondonCorporationcommissionedthisresearchtoshineaspotlightontheregulatorytechnology(RegTech)industry– agroupoftechnologyvendorscommittedtotheuseofthemostuptodatetechnologytohelpregulatedfirmsmeettheirregulatoryobligations.

TheRegTechindustryisatakeymomentinitsdevelopment.Wearecallingformoretobedonetosupportthesectortogrowandthrive,strengtheningLondon’sglobalcompetitiveofferandbenefittingthewiderUKeconomy. InthisresearchreportweseektounderstandindepththebarrierstotheadoptionofRegTechandrecommendasetofmeasuresthatcanbeputinplacetoamelioratethemanychallengestheRegTechindustryfaces.Wedrawonprimaryempiricalresearchandareviewofinternationalbestpracticesforenhancingcompetitiveness.

ThisreportisintendedtofosteracollaborativeapproachtobuildingsustainablegrowthintheRegTechindustryandinparticular,wehopethattherecommendationshereinwillbeconsideredcarefullybyUKpolicymakers–inparticularHMTreasury,theBankofEngland,andtheFinancialConductAuthority.WealsobelievethatboththefinancialservicesindustryandRegTechshaveapivotalroletoplayinsecuringthefutureofRegTechandmakingit acornerstoneofthecompetitivenessofthe UKfinancialsector.

Catherine McGuinness PolicyChairoftheCityofLondonCorporation

Foreword

“The UK has long been recognised globally as a thought leader in financial regulation, so it is no surprise that both the Financial Conduct Authority and the Bank of England have been proactive in their approach to technology innovation.”


Executive summaryToachieveevenamoremodestversionofthis‘paradigmshift’,theRegTechindustrywillneedtoovercomesomeofthekeychallengesthatarecurrentlyholdingitback,andthisinturnwillrequiresupportfromanumberofdifferentstakeholders.Withthissupport,RegTechcanmakeavaluablecontributiontothefuturegrowthandsuccessoftheUK’stechsectorandaddbroadervaluetofinancialservicesandtheUKeconomyasawhole.

Theaimofthisstudy,therefore,istoexploretheUKRegTechindustryandaddressthefollowingcorequestions:

• WhatarethekeybarrierstoinnovationandadoptionofRegTech?

• WhatbestpracticeshavebeenemployedoverseastoenhancecompetitivenessandsupporttheRegTechindustry?

• WhatimpacthasCOVID-19hadontheUKRegTechindustry?

• Whatpolicyandpracticalmeasurescouldbeputinplacetoovercomethebarrierstoadoptionandimprovethelong-termgrowthofRegTech

Thisresearchreportprovidesanin-depthanalysisoftheUKRegTechindustry–anindustrywhichfocusesonprovidingtechnologysolutionstohelpregulatedfirmsmeettheirregulatoryobligations.Focusingonitsapplicationwithinthefinancialservicessector,theRegTechsectorhasseensignificantgrowthsincetheendoftheglobalfinancialcrisisbothinresponsetotheensuingwaveofregulatorychangeandto significanttechnologicaladvancessuchascloudcomputingand datascience.

RegTechhasfar-reachingpotential,asenvisagedinthisambitiousvisionfor theindustry:

“RegTech represents more than just an efficiency tool and rather is a pivotal change leading to a paradigm shift in regulation. Viewed holistically, RegTech represents the next logical evolution of financial services regulation and should develop into a foundational base underpinning the entire financial services sector.”

Arner et al


ApproachBetweenOctoberandDecember2020,theRegTechAssociatesresearchteamdevelopeda360-degreeviewofthemarketbyspeakingtoregulators,institutionsandRegTechvendorsabouttheirperceptionsandneeds.Thisprimaryresearchconsistedof3keyactivities:

• Avoiceofthevendorsurvey,aimedatRegTechvendorswhichattracted161responses,125ofwhichwereofsufficientqualitytoprovidemeaningfuldata

• Follow-uproundtableswithagroupof14RegTechvendorstovalidateandelaborateonthesurveyfindings

• Aseriesofqualitativeinterviewswithglobalfinancialinstitutionsandregulators

PrimaryresearchwasfurtherenrichedthroughabroadliteraturereviewandthedomainexpertiseoftheCityofLondonCorporation’sresearchpartners,RegTechAssociates.

Key findingsAdoption of RegTech

Despite RegTech solutions being adopted in certain critical areas, RegTech is not yet being implemented widely. AlmosthalfofRegTechvendorsviewedthecurrentlevelsofRegTechadoptioninfinancialinstitutionstobe‘moderate’withathirdofrespondentsclassingthelevelas‘low’.

Vendors with solutions for fighting financial crime are more bullish with78.8%ofvendorsinthiscategoryconsideringRegTechadoptiontobe‘high’or‘moderate’.

Experiences and perceptions of RegTech adoption vary according to the type of problem being addressed(e.g.financialcrime,regulationandcompliancemanagement,regulatoryreporting),whichreflectsotherbroadmarkettrends.

Regulators and financial institutions share the view that RegTech still has some way to go before achieving a deeper level of market penetration.

Commercial performance

Most RegTechs are optimistic about their commercial performance, with almost two thirdsexperiencingsalesgrowthin2020andanevenlargermajority(82.3%)expectingfurthergrowthin2021


Barriers to adoption

Despite high levels of commercial optimism, significant barriers to adoption exist with thefivemostcommonlycitedclassifiedasinternaltothebuyingorganisations(financialinstitutions)being:

• Longprocurementcycles

• Lackofbuyereducationandawareness

• Difficultiesofnavigatinginternaldecision-makingprocesses

• Constraintsimposedbylegacytechnology

• Lackofavailablebudget

External barriers to adoption are also present, andthemostcriticalare:

• ThehesitancyofregulatorstopromoteRegTechsolutions

• Thelackofdatastandardsandinteroperability

• Thelackofadigitally-enabledregulatoryframework1

Sub-optimallevelsofawarenessandunderstandingbetweenthedifferentsetsofactorsintheRegTechmarketcanexacerbateperceptionsofthebarrierstoadoption.Forexample,vendorsareoftenunclearabouttherolethatregulatorsarepermittedtoplayinthe‘promotion’oftheirindividualRegTechsolutions.Fromtheregulators’perspectiveitis

1 Theconceptofadigitally-enabledregulatoryframeworkwascoinedina2017jointpaperbyInnovateFinanceandtheTransatlanticPolicyWorkingGroup(TPWG)onFinTechentitled“TheFutureofRegTechforRegulators”(link).TheyreferenceworkbyArneretalinwhichtherapidtransformationoftheglobalfinancialsystemrendersthemeansofapplyingprincipalregulatoryobjectives(i.e.financialstability,prudentialsafetyandsoundness,consumerprotectionandmarketintegrity,andmarketcompetitionanddevelopment)increasinglyinadequate.RegTech--whichisalreadydeliveringdigitisedmanualreportingandcomplianceprocessesandsignificantcostsavingsforfinancialservicesinstitutionsandregulators--ispositionedasthesolutiontothisadequacygap.Specifically,theauthorsfindthatRegTech’spotentialtoenablenearlyreal-timeandproportionateregulatoryregimesthatidentifyandaddressrisk,andfacilitatemoreefficientregulatorycompliance,makeitthenecessaryresponsetowhatArneretaldescribeasa“paradigmshiftnecessitatingthereconceptualisationoffinancialregulation”.ThisRegTech-poweredfutureisreferredtobyTPWGintheirpaperasadigitally-enabledregulatoryframework.(SeeDouglasW.Arner,JànosBarberis &RossP.Buckley,FinTech,RegTech,andtheReconceptualizationofFinancialRegulation,37Nw.J.Int’lL.&Bus.371(2017), https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1817&context=njilb).

clearthatthoughtheycanhaveanimportantconveningandadvocacyrole,withinthelimitsoftheirmandates,theymustremainvendor-neutral.

Financialinstitutionssuggestedthatvendorsneedtohaveadeeperlevelofawarenessandunderstandingofthe‘painpoints’theyareexperiencingandbetterarticulatehowtheirproductscanhelpsolvethem.

Impact of COVID-19

Just over 85% of RegTechs either strongly or somewhat agreed that RegTech has a crucial role to play in helping firms (and supervisors) navigate the challenges posed by COVID-19 butdonotagreeasstronglythatCOVID-19presentsa‘watershedmoment’fortheindustry.

COVID-19 appears to have had a fairly positive commercial impact on the sector overall, thoughthisvariesacrossdifferentcategories,with69%ofRegulatoryReportingfirmsexhibitingapositiveimpactandRegulatoryandComplianceManagementreportingamorenegativeeffect.

In contrast, RegTechs showed less optimism on COVID-19 continuing to be a demand driver for their products, suggestingthatthepositiveimpactmaybeshortlived.

Demand drivers for RegTech

RegTechs stated that the single most useful measure for stimulating demand for their products would be regulators encouraging adoption through their supervisory interactions with financial institutions.

Better education around RegTech for boards of regulated institutions wasalsoconsideredbyRegTechsasacriticaldriverforgrowth.

https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1817&context=njilb

https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1817&context=njilb


Challenges for the RegTech industryThe research uncovered ten significant challenges for the RegTech industry, which interact with each other to create a ‘wall’ which is holding the UK RegTech industry back from reaching its full potential.

AWARENESS

BOARD EDUCATION

TALENT

SCALE

FINANCE

VISION

STANDARDSTECHNOLOGY

REGULATOR STANCE

REPRESENTATION

Ten Key Challenges

Facing UK RegTech

It is still unclear what RegTech is and how it helps firms. Financial services institutions (FSI)

also feel vendors must do more to be aware and respond to their needs

There is a lack of an overall vision or strategy for the RegTech sector which filters down into

tactical deployments at the individual firm level.

Desire to maintain ‘tech neutrality’ reduces visible regulator support for RegTech. Still not

part of day-to-day supervisory discussions.

Lack of a unified voice for UK RegTech prevents effective collaboration and lobbying

on behalf of the sector.

Legacy IT harder to connect into, magnifying challenges of integration and interoperability. Weakens case for digitally enabled regulation.

Myriad rules and data types create a complex solution landscape for buyers to navigate. Lack

of standardisation holds back adoption.

RegTech adoption is stymied by a lack of board awareness. Limits engagement, saps confidence

to invest and drives ‘apathy’.

UK scale ups in the RegTech space share the challenge of accessing finance to grow. Lack of

support for FSIs to invest in ‘risky’ projects.

Lack of access to IT workers with required skills (Tech + FS + Compliance). RegTech image

needs a ‘revamp’ to help attract talent.

FSIs discouraged by ‘riskier’ small vendors, natural preference for ‘BigTech’. Naivety sees inexperienced firms propose unsuitable tools.


AWARENESS TheresearchshowsthatRegTechisasectorwithanawarenessproblem.ThisextendstofundamentalslikethedefinitionofRegTechitself,aswellashowitsupportsfirmstoachievebettercompliance,andwhythatisanattractivegoalforregulatedfirmstotarget.RegTechisnotFinTech,butitistechnologythatcanandshouldbeusedbyfinancialservicesfirmstoenhancetheircompliancestandards.AndyetthelackofawarenessaroundRegTechhasgeneratedasignificantdragonadoption.Intheabsenceofacentraldirectoryofvendors,andanyformofaccreditation,itistougherforfirmstofindthebestvendorstoworkwith.

REGULATOR STANCE

Inthesurvey,68.6%ofvendorscalledonsupervisorstoencourageregulatedfirmstoincreasetheiradoptionofRegTechaspartofthesupervisoryprocess.TheREGULATORSTANCErankedfirstonalistof11potentialremediesputtorespondentsfortheirconsideration.Fortheirpart,UKregulatorsfeeltheyhaveatightropetowalk.Whilenotanti-tech,theyaresomewhathesitanttobeseentochampionanyspecifictypeoftechnologysuchascloud.However,regulatorsdoacknowledgethatgivingclearersignalstothemarketaroundtechnologywouldhelpfirmstobemoreconfidentabouttheirowntechnologyinvestments.

SCALABILITY BarrierstoscalingpresentsarangeofchallengesforUKRegTechs.Smallervendorswithfewerthan50full-timeemployees,whomadeup43.8%ofthesurveysample,canloseoutoncontractstobiggerfirms,eventhoughinstitutionsadmittheyaresometimes‘lessinnovative’thantheirmorediminutivepeers.Tosatisfylong-establishedprocurementprocesses,thereispressuretodemonstratealongtrackrecordofdelivery,toguaranteelongevity,andtogivecomforttobuyersthatfutureproblemswillbeswiftlyremediated.

ScalingrequiresadeeperawarenessoflargerFSI’smorecomplexneedsaswellasR&Dfundingtodoso.However,ifvendorsareenabledtoselltolarger,morecomplexbuyers,closingtheawarenessgapsthatcanopenasfirmsscalerapidly,thelistofpotentialsuppliersthatlargeinstitutionscantapwillgrow,andsotoowilladoption.

The three most pressing challenges to address are:


Recommendations

Short Term >>> Medium Term >>> Longer Term >>>

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New Accreditation & Testing Centre

A Strategy-Led Approach to RegTech

Focus on RegTech Skills & Education

Better Education for Boards

New Incentives to Address Legacy IT

Streamlined and Proportionate Procurement

Adopt a ‘tech embracing’ stance

Clearer guidance on technology risk

Accelerate data and rules standardisation

More awareness of Benefits of RegTech

Coherent and collective voice for the UK RegTech Industry

Better Access to Finance for UK RegTechs

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A matrix of recommendations to addess RegTech challenges

Toaddressthesechallenges,thereportpresents12recommendations,brokendownbythegroupofactorstowhomtheyareaddressed(RegTechvendors,regulatorsandfinancialinstitutions),aswellassomegeneralrecommendationsforconsiderationbyallthreegroups.


Accordingtotheresearchandanalysisfromthisproject,threerecommendations haveemergedasbeingthehighestpriority.

Build AWARENESS in RegTech’s ability to SCALE through an independent testing and accreditation regime

Establishasystemofpractical,independent,technology-drivenRegTechAccreditationtodrivewiderawarenessofUKRegTech,provingtheindustry’sabilitytoprovidescalableandinteroperablesolutions.BycreatinganindependentutilitythatcanactasatestingandprovingplatformforRegTechs,buyerswouldbeprovidedwithgreaterassuranceandconfidencethatthesolutionscandeliver.

Regulators to adopt a ‘tech embracing’ stance to ADVOCATE for improved standards for technology driving regulatory compliance in firms

UKregulatorsshouldadoptavisiblyandactively“techembracing”stanceacrossthewholeoftheirorganisations,drivingexistingpocketsofadvocacywithinleadershipandinnovationteamsdownintothesupervisorylayers.UKregulatorsmustalsobeempoweredtotakeaclearandpositivepositiononRegTech,whilstrecognisingthattherisksofinnovationmustbebalancedwiththebenefits.RegTechshouldbecomearegulartopicofconversationbetweenregulatedfirmsandsupervisors.

Establish a coherent and collective voice for the UK RegTech industry to improve the REPRESENTATION of the industry in the UK

EstablishacoherentandcollectivevoicetorepresenttheUKRegTechindustrytohelpaddressbarrierstoRegTechadoptionbygeneratingmoreawarenessaroundRegTech.Itisenvisagedthatwhateverformthiscollectivevoicetakes,itcouldorchestratesomeoftheactivitiesoutlinedintheserecommendations,particularlyaroundbuildingawarenessandsupportingeducationaroundthesector.Coalescingaroundasharedvisionfortheindustrywouldhelptoclosesomeofthe‘trust’gapsbetweenvendorsandbuyers.RegulatorswouldalsobenefitfromhavingasinglepointofcontactforregulatorswhenseekingviewsfromRegTechs.


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1.1 IntroductionRegTech is a relatively new label used to describe a set of technology solutions that can be used by regulated firms to help meet their regulatory and compliance obligations. This section provides an overview of the history and definition of RegTech and a view of the current state of the RegTech industry in the UK, within the context of the UK’s financial regulatory environment. It then draws attention to the importance of the RegTech industry – both directly to the UK economy and in terms of how a prosperous RegTech industry can further enhance the growth and competitiveness of the UK financial services industry.

RegTech TodayChapter 1


1.2 What is RegTech?Fromadefinitionalperspective,theterm‘RegTech’emergedin2015fromanumberofdifferentsourcesincludingProfessorPhillipTreleaven(UniversityCollegeLondon)1,theUKGovernmentOfficeforScience2andthe FCA3.DefiningRegTechas“a sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities”,theFCA’sworkactedascatalystforanongoingdiscussionabouthowRegTechcouldbefosteredtoimprovecomplianceoutcomesfortheUKfinancialsector.

Whilsttheuseoftechnologyformanagingcompliancedatesbackatleasttwodecades4,whatisnovelaboutthegrowthoftheRegTechindustryinmorerecentyearsistheuseofemergingtechnologiessuchascloudcomputingandapplicationprogramminginterfaces(APIs)aswellastheuseofartificialintelligenceinnewareasthankstotheproliferationofbigdataandthereduction inthecostofcomputingpower.

TheboomintheRegTechindustrycanbetracedbacktoseveralkeyfactors.Firstly,thetideofnewandchangedregulationfollowingtheGlobalFinancialCrisisof2008-9requiredmoresophisticatedsolutionstosatisfythenewregulatoryrequirements.Secondly,thiscoincidedwithdevelopmentsindatascienceandthepossibilitiesofferedbymovingcomputingtocloud-basedinfrastructures.Regulatorsthemselvesadoptednewtoolstoenhancetheiroversightofthefirmsandmarketstheysupervise.Finally,costpressuresfollowingtheeconomicdownturnmeantfinancialfirmsneededtoradicallyimprovetheefficienciesoftheirprocesses,systemsandcontrols.Thiscombinationoffactorsprovidedtheperfectconditionsfortheproliferationofinnovativetechnologysolutionswhichcouldhelptosolveregulatoryobligations.

1 Treleaven,P.(2015)FinancialRegulationofFintechJournal of Financial Perspectives,3(3)

2 UKGovernmentOfficeforScience(2015)FinTechFutures:TheUKasaWorldLeaderinFinancialTechnologiesavailableathttps://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/413095/gs-15-3-fintech-futures.pdf (accessedJanuary2021)

3 FCA(2015)FS16/4CallforInput:SupportingthedevelopmentandadoptionofRegTechavailableathttps://www.fca.org.uk/publication/feedback/fs-16-04.pdf(accessedJanuary2021)

4 Bambergerarguesthattechnologyhasbeenusedtomanageriskandregulatoryobligationssincetheadventofmodernriskregulationandthegrowthofgovernance,riskandcompliance(GRC)softwarepriortotheGlobalFinancialCrisisinBamberger,K.A.(2010)TechnologiesofCompliance:RiskandRegulationinaDigitalAgeTexasLawReview,88(4)

ThoughitisunderstandablethatRegTechisviewedasasubsetofFinTech(aspertheFCA’sdefinition)–itis,afterall,theuseoftechnologyinfinancialservices,thisconflationcanalsobeproblematic.TheFinTechindustryisassociatedwithdisruptiveinnovation,definedbyPalmiereetalas“anyinnovationthatshakesupanindustryandsubstantiallychangesitscompetitivepatterns”5whichisexactlywhatFinTechhasachieved–challengingexistingbusinessmodelsinfinancialservicesbyexploitingnewtechnologiestoreachunderservedmarkets6. RegTech,however,whilstitmaybedisruptiveofincumbenttechnologyproviders,isbetterunderstoodasanenablertofinancialservicesfirms–helpingfirmsfromthedisruptivechallengersthroughtothewell-establishedTier1financialinstitutionsmeettheircompliancerequirements.Thereisacademicsupportforthisview,withArner,BarberisandBucklyarguingthattoconsiderRegTechasapartofFinTechistounderestimatethepotentialoftheindustry7anditsinherentdifferencesintermsofbothoriginsandobjectives.

AnotherimportantconsiderationisthatfinancialservicesisnottheonlyindustrythatbenefitsfromtheapplicationofRegTech.Other,highlyregulatedindustriessuchasthelegalsector,government,gamblingandgaming,healthcareandenergyarealsoincreasinglyadoptingRegTech8.Toovercometheseconcerns,throughouttheresearchforthisprojectandinthisreport,RegTechisdefinedsimplyas“the use of technology to help regulated firms meet their regulatory obligations”.

5 Palmié,M.,Wincent,J.,Parida,V.,&Caglar,U.(2020).Theevolutionofthefinancialtechnologyecosystem:Anintroductionandagendaforfutureresearchondisruptiveinnovationsinecosystems.TechnologicalForecastingandSocialChange,151,119779.p.4

6 Christensen,C.M.,Raynor,M.E.,&McDonald,R.(2015).Whatisdisruptiveinnovation.Harvardbusinessreview,93(12),44-53.

7 Arner,D.W.,Barberis,J.,&Buckey,R.P.(2016).FinTech,RegTech,andthereconceptualizationoffinancialregulation.Nw.J.Int’lL.&Bus.,37,371.

8 RegTechAssociatesresearchdatabase,Radar.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/413095/gs-15-3-fintech-futures.pdf



https://www.fca.org.uk/publication/feedback/fs-16-04.pdf



Figure 1.1 RegTech Associates Taxonomy of the RegTech Market

1.3 RegTech – understanding the problems and solutions

Withinfinancialservices,regulatoryobligationsrangefromcomplexcalculationsforcapitaladequacyregulationsthroughtoensuringthefairtreatmentofcustomers.Now,morethanever,regulationtouchesnearlyeveryaspectofafinancialinstitution–whetheritisabank,insurerorassetmanager.TocapturetherichnessofthetypesofRegTechsolutionsthatareavailableinthemarket,RegTechAssociates

hasdevelopedaproblem-orientedmethodofclassifyingRegTechproducts9.

RegTechAssociateshasaresearchdatabaseofover1,200distinctRegTechproducts,categorisedaccordingtothistaxonomyandthedefinitionsfoundinExhibit1.1RegtechAssociatesRegTechTaxonomyDefinitions.

9 TheCambridgeCentreforAlternativeFinanceresearchedthevariousRegTechtaxonomiesthathavebeendeveloped,includingtheRegTechAssociatesproprietarytaxonomy.SeeSchizas, E.,McKain,G.,Zhang,B.Z.,Garvey,K.,Ganbold,A.,Hussain,H.,... &Yerolemou,N.(2019).TheGlobalRegTechIndustryBenchmarkReport.AvailableatSSRN3560811.

Figure 1.1 RegTech Associates Taxonomy of the RegTech Market


Financial Crime (FinCrime)FinancialCrimedealswithhelpingfirmscomplywithanti-moneylaundering,frauddetectionandcounterterrorismfinancinglegislation.

Regulatory Reporting (RR)Regulatoryreportingacrossarangeofdatatypes,includingaggregatedcapitaladequacyandriskmanagementdata.

Market Integrity & Transparency (MIT)Financialmarketsareregulatedtoensuretheyarefair,efficientandtransparent.MIThelpsfirmscomplywiththeseregulatoryrequirements.

Regulatory & Compliance Management (RCM)Regulatorychangeandongoingcompliancemonitoringisacritical activityforallregulatedfirmsduetothevolumeofruleswithwhichtheymustcomplyandtherateandscaleofchangesto these rules.

Cyber, Identity and Privacy (CIP)CIPfocusesonhelpingfirmsaddresscybersecurityrisks,dataprotectionanddataprivacyissues,andensuringtheidentityofalldevicesandapplicationsforwhichtheclientisresponsibleareknown,recognisedandverified.

Regulatory Risk Analytics and Calculations (RRAC)Severalaspectsofregulationrequireregulatedfirmstoperformcomplexriskcalculations,scenariosandsimulationsforvariouspurposessuchaspricing,capitalallocationandstresstesting.FirmsarealsorequiredtoperformcalculationsforprudentialregulationsuchasBasel3andSolvency2.

CASE STUDY

Regtech Associates – RegTech Taxonomy Definitions

Regulatory Data and Information Management (RDIM)Beforefirmscanaccuratelyanalyseorreportonregulatorydata,thereisalotofworktodotoimprovedataquality,understandthelineageofindividualdataitemsandapplybestpracticedatagovernanceprinciples.Thereisalsoadrivetowardstheneedforcommon,granulardatamodelstobreakdownorganizationaldatasilos.

Environmental, Social, Governance (ESG)ESGhelpsfirmsbyintegratingESGfactorsintotheirmiddleandbackofficeoperationstoensurecompliancewithinternalpoliciesandexternalregulations.

General Compliance (GenComp)GeneralCompliancefocusesonhelpingfirmsaddressproblemsthatareeitheragnostictospecifictypesofregulation--e.g.training,marketingcompliance,supplychainrisk--orthatcutacrossregulatoryboundaries

Tax Compliance (TaxComp)Productsinthiscategorytendtosolvecomplianceproblemsthatspananumberoftaxregulations

OtherThiscategoryincludesRegTechproductsthatfocusonindustrysectorsotherthanfinancialservices(e.g.healthcare)andproductswhereregulatorycomplianceisoneofmanyusecasesforthetechnology.


Globally, the distribution of RegTech products within these categories is as shown in Figure 1.2

Diving into the technologies that underpin these products, the data shows that the most common technologies used in the UK RegTech industry are10:

• Cloud computing – The delivery of computing services (servers, databases, software etc) over the internet to offer faster innovation and scalability. RegTechs use cloud computing to provide solutions for financial institutions to manage compliance while driving down costs related to installing and managing the solution.

• Artificial Intelligence (AI) – AI is technology which simulates human intelligence in machines that are programmed to think and act like humans. Different AI techniques are used by RegTechs such as such as machine learning, character recognition, natural language processing and predictive data analytics.

• Application programming interface (API) – a computing interface that relays information between multiple software intermediaries. RegTech Software as a service (SaaS) solutions use APIs to integrate data and solutions into existing client systems.

10 RegTech Associates research database, Radar.

• Robotic process automation (RPA) – RPA is a software-based technology which can be easily programmed to automate basic, repetitive tasks. RPA is utilised by RegTechs to automate processes such as regulatory or tax reporting to increase efficiency and reduce human error.

• Distributed ledger technology (DLT) – DLT is a database that is consensually shared and synchronised across multiple sites, institutions or geographies, accessible by multiple users. RegTechs use DLT to improve regulatory reporting by providing high data granularity, data quality, and transparent view on live transactions.

• Biometrics – Biometrics are body measurements and calculations related to human characteristics. RegTech KYC platforms use biometric authentication as a form of identification, verification and access control.

Figure 1.2 Distribution of global RegTech products by category

GenComp4.3%Other3.1%Tax Comp2.5%RRAC3.4%RRIDM7.1%RR4.3%RCM9.0%

ESG8.9%MIT8.9%

FinCrime32.1%

CIP16.5%


1.4 The UK RegTech industry

1.4.1 What problems is RegTech solving in the UK

TheUKRegTechindustrycomprises234companiesthatareheadquarteredhere andapproximatelyanother335companies thatarebasedoverseasandoperateinthe UKorworldwide.Figure1.3showsthedistributionoftheproductsfromthosecompaniesacrosstheRegTechcategoriescomparedtotheoverallglobalpopulation ofRegTechproducts.

ItisclearfromFigure1.3thatthelargestproportionofRegTechsheadquarteredintheUKandoverseasRegTechsoperatingintheUKareclassifiedasfinancialcrime.Tacklingmoneylaundering,fraudandterroristfinancingisacriticalregulatoryobjectiveandonewhichisripefortheuseofmachinelearningandroboticprocessautomationtogainsignificantefficiencies.Inaddition,someofthelargestregulatoryfinesoverthelasttenyearshavebeenforAMLfailingsinfinancialfirms.

CASE STUDY

Spotlight on RegTech for Fighting Financial Crime

Financialfirmshavestrictregulatoryobligationswhenitcomestotacklingmoneylaunderingandterroristfinancing.Thesefirmsmustprovetheyhaveasolidunderstandingofeachcustomerandthefinancialcrimeriskthattheyposetothefirm–requiringthecollectionandvalidationofkeyinformationabouttheircustomerswhichmustbeconstantlyreviewedandkeptuptodate.Forhigherriskcustomers,suchaspoliticallyexposedpersons,enhancedlevelsofduediligencemustbeperformed.

Inaddition,financialfirmsmustmonitorandreportanysuspicioustransactionalactivitythatcouldbeindicativeofmoney-launderingorterroristfinancing.

Managingandremainingcompliantwithalltheserequirementsisaverycomplexproblem,butRegTechhasprovedtobeparticularlypowerfulinprovidingeffectivesolutions.

ByadoptingtechnologiessuchasAPIsandcloud-basedinfrastructurethroughwhichdatacaneasilybedeliveredforcustomerchecking,documentverificationornamescreeningpurposes,muchofthemanualeffortintheKYCprocesscanbeautomated.

MachinelearningisalsoakeytechnologydrivingthesuccessofRegTechinhelpingtofightfinancialcrime–MLcombinedwithmoretraditionalrules-basedapproachescansignificantlyenhancethedetectionofsuspiciousactivity,analysingcustomerbehaviourandmultipledatasetstoidentifyanomalies.

NotablesuccessesinthiscategoryincludetheuseofQuantexabyStandardChartered11andtherecentimplementationofSilentEightbyHSBC12.

11 https://www.quantexa.com/press/standard-chartered-and-quantexa-tackle-financial-crime/(AccessedJanuary2021)

12 https://silenteight.com/2021/01/06/hsbc-and-silent-eight-announce-multi-year-partnership-to-fight-financial-crime/(AccessedJanuary2021)

0 Percentage 25 50 75 100

Whole directory data set

UK HQ

Overseas operating in UK

Figure 1.3 Comparison of distribution of RegTech categories in complete population versus UK Headquartered RegTechs and Overseas RegTechs operating in the UK

11 https://www.quantexa.com/press/standard-chartered-and-quantexa-tackle-financial-crime/(AccessedJanuary2021)

12 https://silenteight.com/2021/01/06/hsbc-and-silent-eight-announce-multi-year-partnership-to-fight-financial-crime/ (AccessedJanuary2021)

https://www.quantexa.com/press/standard-chartered-and-quantexa-tackle-financial-crime/

https://www.quantexa.com/press/standard-chartered-and-quantexa-tackle-financial-crime/

https://silenteight.com/2021/01/06/hsbc-and-silent-eight-announce-multi-year-partnership-to-fight-financial-crime/

https://silenteight.com/2021/01/06/hsbc-and-silent-eight-announce-multi-year-partnership-to-fight-financial-crime/


ThenextlargestcategoryofUKheadquarteredRegTechsolutionsisMarketIntegrityandTransparency,withjustover13.7%ofproductsaimingtosolveproblemsassociatedwithconductrisk,detectingmarketabuseandinsiderdealingandensuringfairnessandtransparencyinfinancialmarkets.AlotoftheproductsinthisareaweredevelopedindirectresponsetothesecondEUMarketsinFinancialInstrumentsDirectiveandRegulationwhichenteredintoforceinJanuary2018.

Cyber/Identity/Privacy(CIP)andRegulatoryDataandInformationManagement(RDIM)arethenexttwolargestcategories,at12.9%and12%respectively.ProductsintheCIPcategoryaddresscybersecurityrisks,dataprotectionanddataprivacyandensuretheidentityofalldevicesandapplicationswithinafirmareknown,recognisedandverified.RDIMproductsfocusonautomatedsolutionstoimprovedatagovernance,lineageandmanagement,especiallyfordatathatisusedforregulatorypurposese.g.regulatoryortransactionreporting.ForoverseasRegTechsoperatingintheUK,CIPisinsecondplaceat20.6%,whilstESGisthethirdhighestat14.63%.

CASE STUDY

Spotlight on RegTech for Regulation and Compliance Management

Regulatoryandcompliancemanagementisacriticalactivityforallregulatedfirmsduetothevolumeofruleswithwhichtheymustcomplyandtherateandscaleofchangestothese rules.

Inaddition,regulatedfirmsneedtohaveoversightoftheircomplianceandregulatoryrisksacrosstheenterprise,whichmeansunderstandingwhichregulatoryobligationsmaptowhichbusinessprocesses,policiesandcontrols.Finally,firmsneedtobeabletoprovetheiradherencetoregulationsandevidencethistotheirsupervisors.

RegTechhascomeupwithsomenovelsolutionstosupportfirmstoensuretheyunderstandalltheupcomingchangestoregulatoryrules–forexampleusingtechniquessuchascomputervisionandnaturallanguageprocessingtoextractregulatoryalertsandchangesfromregulators’websitesandthenapplymachinelearningtoclassifythesechangessotheycanbeanalysedmoreeasily.

Similartechnologiescanbeappliedtotheexistingrulebooks,and,combinedwithpolicyandcontrollibraries,canprovideacomprehensiveanddynamicinventoryofalltheregulatoryrulesandobligationswithwhichafirmmustcomply,makingiteasiertobothmonitorcurrentcomplianceandunderstandtheimpactofanyupcomingregulatorychanges.

ClauseMatch,adocumentmanagementandworkflowcollaborationplatformthatfocusesonregulationandpolicymanagement,hasdemonstratedthevalueofitssolutionthroughasuccessfulongoingpartnershipwithBarclays13.

13 https://clausematch.com/blog/clausematch-barclays-compliance (AccessedJanuary2021)

https://clausematch.com/blog/clausematch-barclays-compliance


1970 1980 1990 2000 2010 2020

30

20

10

0

Figure 1.4 Number of new RegTech companies founded by year in the UK

0 20 40 60 80 100

2020

2016

Figure 1.5 Comparison of RegTechs by age bracket – 2016 vs 2020

1.4.2 Industry maturity and growth

TheUKRegTechindustryisnolongerdominatedbysmallstart-ups–theindustry ismaturingandRegTechsareseekingthe scaleandthefundingtogrowatspeed.Historically,forRegTechsheadquarteredintheUK,thesectorexhibitedenormousgrowthfrom2010onwards,withapeakin2016,asshowninFigure1.4.

ThesharpdeclineinthenumberofnewRegTechsafterthisindicatesthattheindustryisnowscaling,andthisisborneoutconsidering

therelativeageoftheUKRegTechs.GroupingsofRegTechsbyagebracketdemonstratesthismarketmaturity.Theseagebracketsare:

• Incumbents(morethan10yearsold)

• Challengers(between5and10yearsold)and

• NewKidsontheBlock(lessthan5yearsold)

Figure1.5comparestherelativeproportions ofRegTechsintheseagebracketsbetween2016(‘peak’RegTech)and2020.ThereisamuchlowernumberofNewKidsontheBlockin2020comparedto2016.


AccordingtoTechNation,theUKisthebiggest‘scale-up’countryinEurope,andin2019“81.2% of UK tech investment was made into high-growth, high-productivity potential scaleup firms – those with at least 10 employees and growing by at least 20% year on year”14.TheRegTechmarketisfollowingthistrendwithafocusonrevenuegrowthandscaling,notjustofcompaniesbutalsooftheirproducts.

Globally,theRegTechindustrycontinuestoattractsignificantlevelsoffunding.Estimatesputtheleveloffundingraisedworldwidefrom2017totheendofJune2020tobetween$11bnand$18.7bn15.ItisdifficulttoobtainamoregranularbreakdownoffundingforUKheadquarteredfirmsbutRegTechAssociatesestimatesthatthefigureforinvestmentin UK-basedRegTechsforthesametimeperiod isroughly$3bn16.

SomeofthemostsignificantinvestmentdealsforUKRegTechsoverthelasttwoyearsareshowninTable1.1.Notably,despitethecircumstancesofthecoronaviruspandemic,2020sawsomelargelaterseriesfundingrounds.Again,thisisacharacteristicofanindustrythatisscalingupatpace.

14 TechNation(2020)UKTechforaChangingWorld:TechNationReporthttps://technation.io/report2020/#forewords (accessedJanuary2021)

15 KPMG(2020)PulseofFinTechH12020https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/09/pulse-of-fintech-h1-2020.pdf (accessedJanuary2021),https://member.regtechanalyst.com/regtech-investment-in-h1-2020-defies-expectations-with-growth-in-funding-despite-economic-uncertainty/(accessedJanuary2021)

16 RegTechAssociatesDatabase(Radar),Crunchbase

1.4.3 COVID-19 and RegTech

Againstthisbackdropofscalingandgrowth,in2020thecoronaviruspandemicstruck,creatingawholenewsetofchallenges(andpotentialopportunities)fortheRegTechindustrytonavigate.TheFCAhavesuggestedthatCOVID-19isa‘keywatershedmoment’17fortheindustryandtherearecertainlyanumberoffactorsrelatedtothecoronaviruscrisisthathavedrivendemandforRegTechsolutions.

Acceleration in the adoption of digital channels for financial services DigitalengagementlevelsinEuropean bankinghaveincreasedby20%18.HSBCandLloydsintheUKhavereportedsignificantincreasesindigitaldeposits19andsomeFinTechcompanieshavereportedsignificantupticksintheirusage20.Withthisincrease indigitalcustomers,financialinstitutions havebeenforcedtomovetoremoteonboarding,usingdigitalmethodsforKnowYourCustomercheckssuchasidentifyverificationanddocumentchecking–somethingthatmanyRegTechvendorsarewellpositionedtoassistwith.

17 https://www.fca.org.uk/insight/regtech-watershed-moment (AccessedJanuary2021)

18 https://www.mckinsey.com/industries/financial-services/our-insights/no-going-back-new-imperatives-for-european-banking? (AccessedJanuary2021)

19 https://www.thisismoney.co.uk/money/saving/article-8254203/HSBC-Lloyds-report-thousands-digitally-scanning-cheques.html (AccessedJanuary2021)

20 https://www.forbes.com/sites/simonchandler/2020/03/30/coronavirus-drives-72-rise-in-use-of-fintech-apps/?sh=5c4c4cf566ed(AccessedJanuary2021)

Name Value Deal Type Date

Onfido $105 SeriesD–Funding April2020

ComplyAdvantage $88.2m SeriesC–Funding July2020

Privitar $80m SeriesC–Funding April2020

Quantexa $64.7m SeriesC–Funding July2020

DueDil $53.4 SeriesC–Funding June2019

SteelEye $17.3m SeriesA–Funding February2020

ACIN £12m SeriesA–Funding September2020

Railsbank £8.14m SeriesA–Funding September2019

Nexus Frontier Tech £1.94m Seed–Funding November2019

Clausematch £1.9m VentureDebt May2019

Table 1.1 Significant funding deals for UK RegTechs 2019-2020

https://technation.io/report2020/#forewords

https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/09/pulse-of-fintech-h1-2020.pdf


https://member.regtechanalyst.com/regtech-investment-in-h1-2020-defies-expectations-with-growth-in-funding-despite-economic-uncertainty/



https://www.fca.org.uk/insight/regtech-watershed-moment

https://www.mckinsey.com/industries/financial-services/our-insights/no-going-back-new-imperatives-for-european-banking?

https://www.mckinsey.com/industries/financial-services/our-insights/no-going-back-new-imperatives-for-european-banking?

https://www.thisismoney.co.uk/money/saving/article-8254203/HSBC-Lloyds-report-thousands-digitally-scanning-cheques.html

https://www.thisismoney.co.uk/money/saving/article-8254203/HSBC-Lloyds-report-thousands-digitally-scanning-cheques.html

https://www.forbes.com/sites/simonchandler/2020/03/30/coronavirus-drives-72-rise-in-use-of-fintech-apps/?sh=5c4c4cf566ed

https://www.forbes.com/sites/simonchandler/2020/03/30/coronavirus-drives-72-rise-in-use-of-fintech-apps/?sh=5c4c4cf566ed


Financialinstitutionsalsoneedtobemindfuloftheirobligationtomanageconductrisks,nomatterthechannelusedfordigitalinteractionandtheFCA’s2019/20BusinessPlanstressedtheimportanceofthefairtreatmentofdigitalcustomers,especiallythosethatarepotentiallyvulnerable.ThisisanothergrowthareaforRegTechsolutionsthatcantrackcustomerbehaviourandprovidefulltransparencyofeveryaspectoftheirdigitalinteraction.

COVID-19 regulatory changes and announcementsEstimatesfromJWGandothervendorswhotrackregulatorychangesindicatebyAugust2020,morethan1,330COVID-19relatedregulatoryannouncementshadbeenmadegloballybyregulators21.RegTechsolutionsthatautomaticallysource,classifyandroutesuchchangestotherelevantpartsofafinancialinstitutioncanhelptoensurefirmskeepontopofthelatestCOVID-relatednewstoensurecompliance.

Mass transition to remote workingAlmostovernight,themajorityofbusinessesintheUKswitchedtoremoteworking,testingtheresilienceandflexibilityoftheirremoteworkinginfrastructures.Forfinancialservicesfirms,specificcompliancechallengesarose,particularlyaroundsurveillanceformarketabuseandmanipulationatatimewhenmarketswereincreasinglyvolatileandmorealertsthanusualwerebeinggenerated.Concernswereraisedoverfirms’abilitiestoadequatelymonitorcommunicationsonvirtualplatformssuchasZoomandthelackofscrutinyoveradistributedworkforcehaveprovidedRegTechswithopportunitiestogainfurthermarketshare.

Exacerbation of fraud and financial crimeInApril2020,theFinancialActionTaskForce(theglobaloversightbodyforanti-moneylaunderingandcounter-terroristfinancing)issuedastatementwarningoftheenhancedfinancialcrimeandfraudrisksresultingfromnefariousactorsattemptingtoexploitthepandemicandoftheneedforincreasedvigilancetomitigatetheserisks.Specifically,FATFexplicitlystatedthatit‘encouragestheuseoftechnology,includingFintech,RegTechandSupTechtothefullestextentpossible’22.

21 https://www.corlytics.com/news-releases/out-of-the-window-covid-19-prompts-unexpected-regulatory-change-for-2020-compliance-risk-management-workplans/(AccessedJanuary2021)

22 https://www.fatf-gafi.org/publications/fatfgeneral/documents/statement-covid-19.html(AccessedJanuary2021)

Again,RegTechprovidersareextremelywellpositionedtorespondtoincreasedlevelsoffinancialcriminality–thesesolutionsareofteneasiertoconfiguretocombatnewtypologiesoffraudormoney-launderingandcancopewithchangingpatternsofcustomerbehaviourwithoutraisinghighvolumesoffalsealerts.

1.5 UK regulatory and policy context

1.5.1 Regulatory philosophy

Overthelasttwentyyears,theUKhasembracedanapproachtofinancialregulationknownasmanagement-basedregulationwhere ‘regulators do not prescribe how regulatees should comply, but require them to develop their own systems for compliance and to demonstrate that type of compliance to the regulator’23. What thismeansmorepracticallyisthattheFinancialConductAuthority(FCA)andthePrudentialRegulationAuthority(PRA)willnotprescribetheprecisepolicies,processes,systemsandcontrolsthatregulatedfirmsmusthaveinplacetoensurecompliance,butarefocusedontheoutcomesandfirms’efficacyinmanagingbothfinancialandnon-financialrisks,aswellasprotectingcustomersandinvestorsandensuringfairandefficientmarkets.

Incombinationwiththismanagement-basedapproachtoregulation,theconceptof‘technologyneutrality’hasemergedinparallelwiththeexponentialgrowthofinformation,communicationsandtechnology(ICT).Legislatorsandpolicymakershaveadoptedthisprincipleof‘technologyneutrality’inregulationandtwokeymeaningsofthisprinciplearerelevanthere.Thefirstisthat‘thesameregulatoryprinciplesshouldapplyregardlessofthetechnologyused.Regulationsshouldnotbedraftedintechnologicalsilos’24andthesecondisthat‘regulatorsshouldrefrainfromusingregulationsasameanstopushthe market toward a particular structure that theregulatorsconsideroptimal.Inahighlydynamicmarket,regulatorsshouldnottrytopicktechnologicalwinners’25.

WhilstoriginallyconceivedasaprincipleforregulatingICTmarkets,financialregulators

23 Black,J.(2012)Paradoxesandfailures:‘newgovernance’techniquesandthefinancialcrisisTheModernLawReview, 75(6)1037-1063

24 Maxwell,W.J.,&Bourreau,M.(2014).Technologyneutralityininternet,telecomsanddataprotectionregulation.ComputerandTelecommunicationsLawReview,31,1-8.

25 ibid

https://www.corlytics.com/news-releases/out-of-the-window-covid-19-prompts-unexpected-regulatory-change-for-2020-compliance-risk-management-workplans/



https://www.fatf-gafi.org/publications/fatfgeneral/documents/statement-covid-19.html



havealsoadoptedthisprinciple.In2017,theFCAsaid‘ourregulatoryphilosophy(subjecttoanyriskstoourobjectives)istobe‘technology-neutral’26thoughtheFCA’sDirectorofInnovationrecentlysuggestedthatintime,thisapproachmayneedtoflexgiventhecentralityoftechnologytothemarketsthattheFCAregulates27.Whatwon’tchangeistheregulators’needtobe‘vendor-neutral’–therewillbenoendorsementforspecificsolutionprovidersorproductsanytimesoon,despiteboththeFCAandBankofEngland’songoingsupportfortechnologyinnovation.

1.5.2 Government and regulatory support for RegTech

TheUKtechnologysectorhasareputationforbeingworld-leading,especiallyintermsofthelevelofprivatesectorinvestmentitattractswhichin2019alonewas£10.1bn28. Butthepublicsectoralsoplaysacrucialroleinencouraginginnovation,andinnovationandtechnologyisakeypillaroftheUKGovernment’s2017IndustrialStrategy29. RegTechhasbenefitedfromfundingandtaxincentivesthathavebeentargetedtowardsthetechnologysector–someofthemostrelevantexamplesaregiveninExhibit1.4.

26 FCA(2017)DistributedLedgerTechnologyFeedbackStatementonDiscussionPaper17/03https://www.fca.org.uk/publication/feedback/fs17-04.pdf(accessedJanuary2020)

27 https://www.fca.org.uk/news/speeches/innovation-hub-innovation-culture(AccessedJanuary2021)

28 https://technation.io/report2020/#10-investment (AccessedJanuary2021)

29 https://www.gov.uk/government/topical-events/the-uks-industrial-strategy(AccessedJanuary2021)

CASE STUDY

UK financial support for technology innovation

Funding

Innovate UK holdsregularfundingcompetitionsforbusinessesandresearchorganisations.Thesecompetitionsareeitherthematicoropen.Theopengrantfundingprogrammeisabottomupcallandanyideasare potentiallyeligible.

Government start-up loans–theschemeoffersupto£25,000tofirmsatafixedinterestrateof6%p.a

Small Business Research Initiative (SBRI)–DeliveredbyInnovateUK:TheinitiativeaimstosupportpublicsectorchallengeswithinnovativeideasfromSMEs.Thecompetitionbasedschemeallowsbusinessestowinanythingfrom£50,000to£100,000totesttheirideawhichcanleadtocontractsofupto£1mtodevelop.UKbasedRegTech,Waymark,hassuccessfullywonanSBRIgrant,workingwiththeBetterRegulationUnitwithintheDepartmentofBusiness,Enterprise,IndustryandSkills.30

Tax incentives

R&D Tax Credit–CompanieswhichfocusonscienceandtechnologyadvancesareabletoreducetheircorporationtaxbyclaiminganR&Dtaxcredit.Inordertoqualify,firmsmusthavefewerthan500employeesandanannualturnoveroflessthan€100milliontoclaimreliefequivalentto230%ofqualifyingexpenditure.

The Patent Box –Thisincentiveenablescompaniestoapplya10%lowerrateofcorporationtaxfromthedevelopmentandexploitationofpatentedinventionsandotherintellectualpropertyintroducedintheUK.

The Seed Enterprise Investment Scheme (SEIS)–UKtaxpayersinvestinginqualifyingstart-upsforthefirst£100,000seedinvestmentareeligiblefor50%incometaxrelief.

The Enterprise Investment Scheme (EIS)–SimilarlytoSEIS,privateinvestorsareeligiblefor30%incometaxrelief.

30 https://www.theiaengine.com/member-news/waymark-tech- secures-phase-2-grant-from-sbri-and-govtech-catalyst/ (AccessedJanuary2021)

https://www.fca.org.uk/publication/feedback/fs17-04.pdf


https://www.fca.org.uk/news/speeches/innovation-hub-innovation-culture

https://www.fca.org.uk/news/speeches/innovation-hub-innovation-culture

https://technation.io/report2020/#10-investment

https://www.gov.uk/government/topical-events/the-uks-industrial-strategy

https://www.gov.uk/government/topical-events/the-uks-industrial-strategy

https://www.theiaengine.com/member-news/waymark-tech-secures-phase-2-grant-from-sbri-and-govtech-catalyst/

https://www.theiaengine.com/member-news/waymark-tech-secures-phase-2-grant-from-sbri-and-govtech-catalyst/


Fromaregulatoryperspective,theUK’sFinancialConductAuthorityandtheBankofEnglandhavebeenatthevanguardintheirsupportoftechnologyinnovation.Fromitsinceptionin2014,FCAInnovatehasbeenprovidingsupporttobothFinTechsandRegTechsandhascomeupwithsomenovelinitiativestousetechnologyforsolvingsomeofthefinancialservicesindustry’smostintractableproblems.Seven‘TechSprints’havebeenheldtodate,thefirstfocusingonConsumerAccessandthemostrecentin2019centeringonAMLandinvolving40organisationsand140participants31.RunbytheFCA’sRegTechteam,theseTechSprintshaveofferedamodelofcollaborationacrossindustry,vendorsandregulatorswhichhavedemonstratedthepowerofwhatcanbeachievedwhenthesethreesetsofactors worktogether.

Buildingonthissuccess,theFCAandtheBankofEnglandjoinedforcestoreimaginetheprocessofregulatoryreportingbymakingittrulydigital.Throughaseriesofphases,theDigitalRegulatoryReportingpilothassoughttoimprovetheefficiencyofregulatoryreportingandtherebyreducetheburden(andcost)tofirms.AnoutlineofthisinitiativecanbefoundinExhibit1.5.MorerecentdevelopmentsincludeacollaborationbetweentheFCAandtheCityofLondonCorporationona‘digitalsandbox’–atestingenvironmentto‘provideinnovativefirmswithaccesstohigh-qualitydatasetstoallowforthetestingandvalidationoftechnologysolutions’32,focusingonusecasestosupporttherecoveryfromthecoronaviruspandemic.

31 FCA(2020)Fosteringinnovationthroughcollaboration:TheevolutionoftheFCATechSprintApproachhttps://www.fca.org.uk/publication/research/fostering-innovation-through-collaboration-evolution-techsprint-approach.pdf(AccessedJanuary2021)

32 https://www.fca.org.uk/news/press-releases/fca-and-city-corporation-collaborate-help-innovative-companies-drive-recovery-coronavirus(AccessedJanuary2021)

Inadditiontothesespecificactivities,theFCARegTechteamholdsshowcasedaysandengageswiththeRegTechindustryviatheRegTechForum,amonthlyeventthatcreatesaplatformfortheindustry,RegTechfirmsandregulatorstodiscussdevelopmentandopportunitiesintheRegTechworld.Clearly,thereisanenormousamountofworkthathasalreadybeendonebyboththeFCAandtheBankofEnglandtosupporttheUK’sRegTechindustrywithintheparametersoftheirmandatesandthisisviewedveryfavourably bytheRegTechindustry.

https://www.fca.org.uk/publication/research/fostering-innovation-through-collaboration-evolution-techsprint-approach.pdf



https://www.fca.org.uk/news/press-releases/fca-and-city-corporation-collaborate-help-innovative-companies-drive-recovery-coronavirus




EXHIBIT 1.5

Digital regulatory reporting – a true example of collaboration

InNovember2016,theFCAranitsfirstTechSprintonthetopicofregulatoryreporting–exploringhowtheFCAhandbookcouldbeconvertedintomachine-readabletextandthepossibilitiesformovingfroma‘push’modelofdatareachingtheregulatorstoa‘pull’model,wheretheregulatorsaccessthedatafromfirmsasandwhenrequired.Followingthis,amoredetailedTechSprintwasheldinconjunctionwiththeBankofEnglandinNovember2017,whichprovedoutthetechnologyrequiredtotakearegulatoryreportingrequirementfromtheHandbookandconvertitintomachine-executablecodethatafinancialinstitutioncouldthenusetosupplytherequired data.

Buildingonthissuccess,thefirstpilotphaseoftheDigitalRegulatoryReportingprojectwaslaunched,whichbroughttogethersixfinancialinstitutionsandprojectteammembersfromtheBankofEnglandandtheFCAtoexplorethefeasibilityofscalingtheproof-of-conceptworkdonefromtheNovember2017TechSprint.Phase2oftheDRRpilottooksomeoftheopenquestionsandissuesraisedinthefirstphase–suchastheeconomicviabilityoftheapproachforsmallerfinancialinstitutions–andpublishedtheviabilityreportinJanuary2020.ThemainfindingwasthatthoughthebusinesscaseforDRRrequiredfurtherwork,therealvalueoftheinitiativewouldonlybeunlockedwiththefullstrategicsupportoffinancialfirmsandregulators.

BoththeFCAandtheBankofEnglandarenowfocusedonembeddingthefindingsfromtheDRRintotheirrespectivedatastrategies33,withtheBankofEnglandcommittedtoimprovingthetimelinessandeffectivenessofdatacollectionacrossthefinancialsector.FortheFCA,theDRRprojectcontinueswithPhase3,establishingthefoundationformachine-readableandexecutablerules,improvingthevalueofthedatathatiscollectedandworkingonthestandardisationofdata.

WhatisnotableabouttheDRRjourneyisthedegreeofcross-industrycollaboration,andthejoined-upapproachofthekeyregulators.Manyoftheproblemsassociatedwithregulatoryobligationshavechallengesthatarecommontoallregulatedfirmsandthroughtheuseofinnovativetechnologyandthepowerofcollaboration,theDRRprojectdemonstratesthatworkablesolutionsaremorelikelytobefound.

33 https://www.bankofengland.co.uk/news/2020/January/fca-and-boe-announce-proposals-for-data-reforms-across-the-uk-financial-sector(AccessedJanuary2021)

Nov 2016

Unlocking Regulatory Reporting TechSprint

Nov 2017

Feb 2018

Call for Input –Using Technology to Achieve Smarter Regulatory Reporting

July –Dec

2018

DRR Pilot Phase 1

Model Driven Machine Executable Regulatory Reporting TechSprint

Oct 2018

Digital Regulatory Reporting Feedback Statement

Jan2019

Digital Regulatory Reporting Pilot Phase 1 Report

Feb -Oct

2019

DRR Pilot Phase 2

Digital Regulatory Reporting Phase 2 Viability Assessment

Jan2020

DRR Phase 3

Feb2020- now

https://www.bankofengland.co.uk/news/2020/January/fca-and-boe-announce-proposals-for-data-reforms-across-the-uk-financial-sector

https://www.bankofengland.co.uk/news/2020/January/fca-and-boe-announce-proposals-for-data-reforms-across-the-uk-financial-sector


1.5.3 Regulatory support for RegTech globally and in other jurisdictions

TheFCA’spioneeringapproachtoRegTechalsohasaglobalreachthroughthefoundingoftheGlobalFinancialInnovationNetwork(GFIN),basedonaproposaltheFCAmadein2018foraglobalregulatorysandbox.LaunchedinJanuary2019,GFINdescribesitselfas‘anetworkofover60organisationscommittedtosupportingfinancialinnovationintheinterestsofconsumers.Itseekstoprovideamoreefficientwayforinnovativefirmstointeractwithregulators,helpingthemnavigatebetweencountriesastheylooktoscalenewideas’34. ThefirstpilotattractedseveralRegTechfirms,largelyfocusedonhowtheirfinancialcrimesolutionscouldbescaledacrossborders.WhilstthereissomewaytogoinprovingthevalueofGFIN,thereisnodoubtthatinitiativessuchasthiscanhelpenormouslywhenRegTechsaretryingtoscaleandexpandoverseas.

WhilsttheUKcanbeviewedasbeingaheadofthecurveinitssupportforRegTech,globalregulatorybodiesandregulatorsinotherjurisdictionsarealsorecognisingthepotentialthatRegTechhasforenhancingcomplianceintheirregions.Fromaglobalperspective,theBankofInternationalSettlements(BIS)hassetupaninnovationhubanditpartneredwiththeG20in2020toholdaglobalTechSprinttofindinnovativesolutionsforoperationalproblemsintheareaofregulatorycompliance.Threeusecaseswereexplored–regulatoryreporting,monitoringandsurveillanceanddynamicinformationsharing.ThewinnersincludedtwoUK-basedRegTechfirms–FNAandRegNOSYS.WorkintheBISInnovationhubwillcontinueinto2022,focusingonhowRegTechcansupportsupervisoryactivitiessuchasregulatoryreporting.

Fornationalregulators,arecentstudybytheFinancialStabilityBoard(FSB)foundthatathirdoftheauthoritiestheysurveyedhadastrategytopromoteorencouragetheuseofRegTechandthatthemostcommonareasforsupportingtheuseofRegTechwereinfinancialcrimecomplianceandregulatoryreporting35.Despitethis,overhalfthesampledonotencouragetheuseofRegTechsothereisaverymixedpicture.Oneregionthathas

34 https://www.thegfin.com/(AccessedJanuary2021)

35 FSB(2020)TheUseofSupervisoryandRegulatoryTechnologybyAuthoritiesandRegulatedInstitutions:Marketdevelopmentsandfinancialstabilityimplications

beenparticularlyactiveinthesupportoftheRegTechindustryareregulatorsinAPAC,withsomeexamplesoftheirinitiativesdescribedbelow.

Monetary Authority of SingaporeTheMonetaryAuthorityofSingapore(MAS)hasheldannualawardsforinnovativeFinTechandRegTechsolutions,announcingthewinnersduringSingapore’sannualFinTechFestival.Aswellasprovidingclearguidancetofinancialfirmsonoutsourcing,MAShasalsoissuedasetofguidelinesaroundtechnologyriskmanagementwhichdescribesthebestpracticesforsoundtechnologyriskgovernance36.Finally,MAShasestablishedaProductivitySolutionsGranttoprovidesmallerfinancialfirmswithfundingtoadoptregulatoryreportingsolutions,valuedatupto$250,000perfirm37.

Hong Kong Monetary AuthorityInNovember2020,theHongKongMonetaryAuthoritypublishedawhitepaperestablishingatwoyearroadmapforthepromotionofRegTechadoptioninthejurisdiction.Withfiveareasofrecommendations,thevisioniswide-rangingandtheactionsthattheHKMAplanstotaketoimplementtherecommendationsare:

• hostingalarge-scaleeventtoraisethebankingsector’sawarenessofthepotentialofRegtech;

• launchingaRegtechAdoptionIndex;

• organisingaGlobalRegtechChallengetostimulateinnovation;

• publishinga“RegtechAdoptionPracticeGuides”series;

• creatingacentralised“RegtechKnowledgeHub”toencourageinformationsharing;and

• establishingaRegtechskillsframeworktodeveloptalents38

Australian regulatorsInAustralia,fundedbytheFederalGovernment,theAustralianSecuritiesandInvestmentsCommissionhaspursuedseveralinitiativestopromotetheadoptionofRegTech

36 MonetaryAuthorityofSingapore(2021)TechnologyRiskManagementGuidelineshttps://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulatory-and-Supervisory-Framework/Risk-Management/TRM-Guidelines-18-January-2021.pdf(AccessedJanuary2021)

37 https://www.mas.gov.sg/development/fintech/psg-grant-for-financial-services-sector(AccessedJanuary2021)

38 HKMA&KPMG(2020)TransformingRiskManagementandCompliance:HarnessingthePowerofRegTechhttps://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2020/20201102e3a1.pdf(AccessedJanuary2021)

https://www.thegfin.com/

https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulatory-and-Supervisory-Framework/Risk-Management/TRM-Guidelines-18-January-2021.pdf




https://www.mas.gov.sg/development/fintech/psg-grant-for-financial-services-sector

https://www.mas.gov.sg/development/fintech/psg-grant-for-financial-services-sector

https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2020/20201102e3a1.pdf




withinAustralia.Usingthisfunding,between2018and2020ASICselectedanumberofdifficultproblemstoaddressthroughproblemsolvingevents,trialsandwebinarscoveringtopicsfromfinancialpromotionstoachat-bottohelpnavigatethefinancialserviceslicensingframework39.

Australia’sPrudentialRegulationAuthority(APRA)hasfollowedasimilarpathtotheBankofEngland,lookingtowardsRegTechtostreamlineitsowndatacollectionandregulatoryreportingprocesses,whilstatthesametime,encouragingtheadoptionofRegTechwithinitsregulatedcommunitytomaketheirdataandreportingcapabilitiesmoreefficient.APRAalsoengageswiththeRegTechindustrythroughongoingengagementwithAustralia’sRegTechindustryassociation40.

1.5.4 A note on SupTech

AtermcreatedtodescribetheuseofRegTechbysupervisoryauthoritiesthemselves,SupTechcanbeviewedastheothersideoftheRegTechcoin.Manyregulatoryauthoritiesareactivelyexploringhowtheycanmakeuseofinnovativetechnologysolutionstobetterexecutetheirsupervisoryduties.ThestudybytheFinancialStabilityBoard41 showed that the mostcommonusesforSupTechtoolswereforregulatoryreportinganddatamanagement(asinthecaseoftheFCAandtheBankofEngland),marketsurveillance,analysisofmisconductandmicroprudentialsupervision.Thisreportalsodetailstwenty-sixcasestudieswhereSupTechhasbeenusedtosolvespecificregulatoryorsupervisoryproblems.

WhatisperhapsmostpertinenttothisreportaresomeoftherisksandchallengesfacedbyregulatorsintheadoptionofSupTechandtheseinclude:

• DataqualityanddatastandardsasbeingprerequisitesforeffectiveSupTechimplementations

• Cyber-riskanddatasecurity

• Increaseddependencyonthirdpartyproviders

39 ASIC(2021)ASIC’sRegTechInitiatives2019-20https://download.asic.gov.au/media/5937756/rep685-published-20-january-2021.pdf(AccessedJanuary2021)

40 https://www.apra.gov.au/submission-to-senate-select-committee-on-financial-technology-and-regulatory-technology(AccessedJanuary2021)

41 FSB(2020)TheUseofSupervisoryandRegulatoryTechnologybyAuthoritiesandRegulatedInstitutions:Marketdevelopmentsandfinancialstabilityimplications

• Attractingtheskillsandtalentsuchasdatascientistsandengineersthatalsohaveregulatoryandsupervisorydomainexpertise

• Challengestocross-borderdatasharingduetolocalisationmeasures

1.6 Benefits of RegTech

“ The benefits and opportunities of regtech and suptech for regulated entities and supervisory authorities to improve efficiency, reduce manual processes and make effective use of data are enormous. As they are more widely adopted, these technologies can enhance diligence and vigilance in risk monitoring and management in real time, improving the resilience and stability of the broader financial system.”42

Inaninfluentialarticle,ArneretalclaimthatRegTechhasthepotentialto‘leadtoaparadigmshiftinregulation’,enablingreal-timesurveillanceofthefinancialmarketsandevenpredictingwhererisksandproblemswillemerge,ultimatelymovingsupervisionandenforcementfromanecessarilyreactiveendeavourtoonethatispreventative.WhetheroneagreeswiththetransformativepowerofRegTechthatthiswouldentail,thereisconsensusabouttheslightlymoremodestbenefitsthatRegTechcandeliver.

1.6.1 Reduction in risk

Thefinancialservicesindustryhasdevelopedmanysophisticatedtechniquesformanagingalltypesofrisk–riskisfundamentaltothebusinessofthesector.Managingtheriskofregulatorycompliancehasbeenafairlynewdevelopment,43butwiththeenormousfinancialcostofregulatoryinfractions44sincetheglobalfinancialcrisis,managingtheriskofnon-complianceismoreessentialthanever.Operationalandhumanerrorsresulting

42 Cœuré,B.(2020)Speech:Leveragingtechnologytosupportsupervision:challengesandcollaborativesolutionsBankofInternationalSettlementshttps://www.bis.org/speeches/sp200819.htm(AccessedJanuary2021)

43 Lewin,S.,2016.Regulatedorganizations:respondingtoandmanagingregulatorychange.TheLondonSchoolofEconomicsandPoliticalScience.

44 OneestimateputsthetotalcostofUSandEUregulatoryfinesatover$342bnhttps://www.reuters.com/article/us-banks-regulator-fines/u-s-eu-fines-on-banks-misconduct-to-top-400-billion-by-2020-report-idUSKCN1C210B(AccessedJanuary2021)

https://download.asic.gov.au/media/5937756/rep685-published-20-january-2021.pdf


https://www.apra.gov.au/submission-to-senate-select-committee-on-financial-technology-and-regulatory-technology

https://www.apra.gov.au/submission-to-senate-select-committee-on-financial-technology-and-regulatory-technology

https://www.bis.org/speeches/sp200819.htm


https://www.reuters.com/article/us-banks-regulator-fines/u-s-eu-fines-on-banks-misconduct-to-top-400-billion-by-2020-report-idUSKCN1C210B




frommanualprocessescanbesignificantlyreducedthroughtheautomationcapabilitiesofRegTechsolutions.

RegTechsolutionsalsohavethecapabilitytoprocesslargevolumesofdisparatedatatoidentifypreviouslyundetectedrisks(especiallyforfraudandfinancialcrime)andtoprovideearlywarningsthroughtheuseofpredictiveanalytics.Individualfirmscanthereforebenefitfrommorerobustcomplianceriskmanagement–butthisreductioninriskalsoscalesupwiththepotentialto‘strengthentheresilienceofthefinancialsystemthroughnewmeanstofacilitateorimprovesupervision,surveillanceandenforcementbyauthorities;andreportingandcompliancebyregulatedinstitutions’45.

1.6.2 Improvements in efficiency and effectiveness

Aswellasriskreduction,automatingrepeatable,standardisedtaskscansignificantlyimprovetheefficiencyofmanagingcompliance–releasingpeopletofocusonmore‘highvalue’taskssuchasanalysisanddecision-making.Oneclearexampleofthisisinthecustomeronboardingprocess,wheremanualprocessesusedtoverifyidentificationandobtaindocumentationduringtheaccountopeningprocesscanbeautomated,speedinguptheprocessandsmoothingouttheexperienceforthe customer.

Effectivenessofprocessescanalsobeimproved,havingaknock-oneffectonefficiencyaswellascost(seebelow).Itiswellknownthatincumbent,rules-basedsystemsformonitoringtransactionsforsuspiciousactivitythrowupahighleveloffalse-positivealerts(insomecases,thiscanbeasmuchas95-99%),eachofwhichneedstobeinvestigatedbyananalyst.Bylayeringmoreinnovativetechnologiesoverthetop,suchasmachinelearning,someprovidersareabletoachieveareductioninfalsepositivesbyasmuchas40%46.

45 FSB(2020)TheUseofSupervisoryandRegulatoryTechnologybyAuthoritiesandRegulatedInstitutions:Marketdevelopmentsandfinancialstabilityimplicationsp3

46 Deloitte(2018)Thecaseforartificialintelligenceincombatingmoneylaunderingandterroristfinancing:Adeepdiveintotheapplicationofmachinelearningtechnologyhttps://www2.deloitte.com/content/dam/Deloitte/sg/Documents/finance/sea-fas-deloitte-uob-whitepaper-digital.pdf(AccessedJanuary2021)

1.6.3 Cost savings

Thereisnodoubtthatregulatorycomplianceisanexpensivebusiness–andthatthesecostscontinuetogrow47.IntheUK,theprojectedannualcostoffinancialcrimecompliancealoneis$49.5bn48,whilstanotherstudyfoundthatmorethanathirdoffinancialservicesrespondentssaidtheywouldbespendingmorethan5%oftheirrevenueoncompliance49.Ifthis5%figureisaccurate,theannualcostofcompliancefortheUK’stopfivebanks50(basedon2019revenuefigures)isaround£5.2bn.

However,byimprovingtheefficiencyandeffectivenessofregulatoryandcomplianceprocesses,RegTechalsopromisestodelivercostsavingstofinancialinstitutions.Usingthefiguresstatedabove,andapplyingaveryconservativeassumptionthatRegTechcouldsaveatleast0.05%oftotalcompliancecosts,therewouldbeanannualsavingof£523mforthesefivebanksalone–£523mwhichcouldberedirectedtoimprovetheprofitabilityandthereforethecompetitivenessofindividualfirmsandtheUKfinancialsectormoregenerally.

1.6.4 Enabling greater insights for decision making

BymakinguseoftechnologicalinfrastructuresuchascloudcomputingandAPIs,aswellasnewanalyticalmethodsandtools,RegTechprovidesnewcapabilitiesintherealmofdataanalysis.Newsourcesofunstructureddatacanbeaddedtomoretraditionalstructureddatasetstogainnewinsights,highlightingnewsourcesofrisk–notjustinfinancialcrimebutalsointermsofmarketmanipulationandinsiderdealing.Forexample,bybringingtradeandcommunicationssurveillancetogetherinoneplatform,RegTechcanenableconsolidatedreportingforregulatorypurposesorformanagementinformationtoaiddecisionmaking.

47 ThomsonReuters(2020)CostofCompliance:Newdecade,newchallenges.

48 LexisNexisRiskSolutions(2020)TrueCostofFinancialCrimeComplianceStudy

49 Duff&Phelps(2020)GlobalRegulatoryOutlook2020:TheRegulatoryOutlookEvolveshttps://www.duffandphelps.com/insights/publications/compliance-and-regulatory-consulting/global-regulatory-outlook-2020(AccessedJanuary2021)

50 Barclays,HSBC,Lloyds,NatWestandStandardChartered

https://www2.deloitte.com/content/dam/Deloitte/sg/Documents/finance/sea-fas-deloitte-uob-whitepaper-digital.pdf



https://www.duffandphelps.com/insights/publications/compliance-and-regulatory-consulting/global-regulatory-outlook-2020




1.7 Importance of RegTech to the UK economy

Whilstdetailedeconomicmodellingwasoutsidethescopeofthisresearch,itisclearthattheUKRegTechindustrycouldplayanimportantroleinitscontributiontoboththedigitaleconomyandtothefinancialservicesindustry.

TheRegTechindustryintheUKismakingacontributiontotheeconomybothdirectly–throughtaxationandjobcreation,andindirectly.RegTechAssociatesdatashowsthattherearearound230RegTechcompanieshead-quarteredintheUK.Inaddition,thereare330overseasRegTechfirmseitherwithanofficeintheUKorwhoareoperatingglobally.RegTechAssociatesestimatesthattheUKRegTechindustryemploysapproximately68,000people,occupyinganumberofrolesfromsoftwaredevelopingthroughtosales,marketingandfinance.Thisamountsto2.3%ofallthejobsintheUK’sTechnologySector51. GiventhatRegTechisanindustrythatisclearlyscaling-up,thereishugepotentialforadditionaljobcreationinthissector,helpingtostrengthentheUK’splaceasacentreforglobaltechnologyinnovationora‘scientificsuperpower’52.

Indirectly,greateradoptionofRegTechcanaddfurthervaluetotheUKeconomybyrealisingthebenefitsoutlinedabove–makingUKfinancialservicesfirmsaremoreefficient (e.g.fasterprocessesatlowercost)andloweringsystemicrisk(e.g.firmsaremoresecureandmanagetheirrisksmoreeffectively)withbetteroutcomesforcustomersandinvestors.AhealthyRegTechindustrycancontributetoamoreprofitablefinancial sector,increasingtaxrevenuesandmaintainingtheUKasapre-eminentglobalfinancialserviceshub.

51 Basedon2019figuresofUKTechemploying2.93millionpeoplefromTechNationhttps://technation.io/jobs-and-skills-report/#key-statistics(AccessedJanuary2021)

52 HMTreasurySpendingReview2020https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020(AccessedJanuary2021)

1.8 ConclusionRegTechintheUKisanindustryatthecuspofmaturity,anindustrywiththepotentialtoscaleandrealisegreatbenefitsfortheUKfinancialservicessectorandtheeconomyasawhole.AspartoftheUK’sworld-leadingdigitalsector,RegTechdemonstratesinnovationandinventivenessandappliestechnologytosolvearangeofregulatoryandcompliancechallengesthathavepreviouslybeenthoughttobeintractable.

RegulatorsalsoseethepotentialofRegTech,notonlyforthefinancialservicesindustrybutthroughitsapplicationtotheirownsupervisoryresponsibilities,allcontributingtothestrengthandsoundnessofthefinancialsystem.IfRegTechistoachievethevisionofa‘paradigmshift’inregulation,muchmoreneedstobedonetoacceleratethegrowthandbuildtrustbetweenregulators,financialinstitutionsandvendors.

Theremainderofthisresearchreportfocusesontheempiricalevidencegatheredthroughquantitativeandqualitativefieldwork,tellingastoryofanindustrythathasadesiretoscalebutneedstoovercomecomplexnetworkofchallengesinordertodoso.

https://technation.io/jobs-and-skills-report/#key-statistics

https://technation.io/jobs-and-skills-report/#key-statistics

https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020




This section focuses on the results of the fieldwork and is centred on five key themes:

UK RegTech adoption

UK RegTech sales performance


Impact of COVID-19

Demand drivers

Key findingsChapter 2


2.1 OverviewThissectionfocusesonthedetailedresultsofthefieldworkconductedforthereport,andiscentredonfivekeythemes:

UK RegTech adoption–areviewofthehighlevelfindingsfromthesurvey(2.2.1),togetherwithanexplanationofbroadermarkettrends(2.2.2)andthecomparableviewsofregulatorsandinstitutionsinterviewedforthestudy(2.2.3).Thissectionalsoincludesboxoutsoneachofthespotlightcategoriesselectedforthereport–financialcrime(FC)andregulatoryandcompliancemanagement(RCM).

UK RegTech sales performance–areviewofthereportedUKsalesperformanceofRegTechsintheperiod2019-20(2.3.1),forecastUKsalesperformanceintheperiod2020-21(2.3.2),withdiscussionofthedifferentmicro-trendsevidentacrosssolutioncategories.

Barriers to adoption–areviewofthebarrierstoadoptionidentifiedinthereport(2.4.1),withananalysisofkeyfindings(2.4.2)andaspotlightonthetrendsseenindifferentRegTechcategories(2.4.3).Externalbarrierstoadoptionareconsidered(2.4.4)introducingtheviewsofinstitutionsonadoptionbarriersingeneral(2.4.5)andonbudgetavailabilityinparticular(2.4.6).Theviewsofregulatorsregardingthesebarriersarethendiscussed,bothingeneralterms(2.4.7)aswellasinrelationtothethemeofmarketawarenessofRegTech(2.4.8)aswellastheapathyofboardstowardsRegTechprojects(2.4.9).Finally,aseriesofadditionalbarriersthatsurfacedthroughtheinterviewswithinstitutionsareconsidered(2.4.10).

Impact of COVID-19 –areviewofthereportedimpactofthepandemiconUKRegTechadoption

(2.5.1)aswellasitsinfluenceondiscreteRegTechcategories(2.5.2).Thenotionofthepandemicasa‘watershedmoment’forRegTechisalsoconsidered(2.5.3)asareitsbroaderimplicationsforUKRegTechbusinessperformance(2.5.4)anddemandforsolutions(2.5.5).

Demand drivers –tocloseoutthekeyfindings,themeasuresthatvendorswerelookingfortohelpstimulatedemandforRegTechsolutionsintheUKareconsidered(2.6.1).

2.2 UK RegTech adoption

2.2.1 High level findings

OneofthekeyresearchobjectiveswastogaugethelevelofdemandandadoptionofRegTechintheUK.MostofthevendorswhocompletedthesurveybelievethereisstillsomewaytogobeforetheUKRegTechmarketbecomessaturated.Indeed,asFigure2.1shows,almosthalf(49.2%)regardthelevelofRegTechadoptionbyUKFSIstobe‘moderate’inscale.Whilstvendorsobservethebanks,assetmanagers,insurersandotherfinancialservicesorganisationsareadoptingsolutionsincertaincriticalareas,RegTechisnotyetbeingimplementedwidely.

Notably,however,formorethanone-quarterofrespondents(29.0%)theUKpictureisfarlesspositive,withRegTechadoptioncharacterisedas‘low’.Inthisscenario,institutionsarestillonlyexperimentingwithRegTechandareyettoshowthedesiretofullycommittimeandresourcestoafully-fledgedRegTechstrategy.ThisviewwasparticularlyevidentinthecaseofRegulatoryandComplianceManagement(RCM)vendors,56.5%ofwhomconsideredlevelsofRegTechadoptiontobelow.Incontrast,fewerthanhalfasmany

0 Percentage 20 40 60 80 100

All responses (n=124)

Financial crime (n=37

Regulatory reporting (n=20)

14.5% 49.2% 29 % 7.3%

15.2% 63.6% 21.2%

4.3% 26.1% 56.5% 13%

26.7% 66.7% 6.7%

Regulatory and compliancemanagement (n=26)

0 Percentage 20 40 60 80 100

Figure 2.1 Perceived levels of RegTech adoption by financial institutions (n=125)

Question: “How would you rate the level of RegTech adoption within UK financial services institutions?”

Source:UKRegTechVendorSurvey2020(CityofLondonCorporation/RTA)


(21.2%)ofFinancialCrime(FC)vendorssharedthatgloomyopinion.And,turningtoRegulatoryReporting(RR),theproportionofvendorsreportinglowlevelsofadoptiondwindlesdowntoonly6.7%.Clearlythen,vendorsoccupyingdifferentsolutioncategorieshavehaddifferentexperiencesoftractionandpenetrationintheUKmarket.Indeed,thistrendissomethingthatplaysoutagainandagainacrosstheresearchthemes,underscoringthecomplexnatureoftheresponseneededtoachievesustainablegrowth.

Atthemostpositiveendofthespectrum,12.4%ofsurveyrespondentsoveralldescribedthelevelofRegTechadoptionbyUKinstitutionsas‘high’.Intheirview,mostUKFSfirmsareusingRegTechtoolsandsolutionsacrosstheboard,engagingfullywiththeopportunitiespresentedbytechnology-enabledcompliance.Againthough,thesamesub-trendisevidentwhencomparingcategories.Whileanaboveaverage15.2%ofFCvendorsregardedadoptiontobehigh,thisfiguredropssharply,toonly4.4%intheRCMcategory.And,onceagain,RRvendorsprovethemselvestobeamostoptimisticcohort,withmorethanone-quarter(26.7%)reportinghighlevelsofadoptioninUKfinancialservices,wellabovetheaverageandconsiderablymorethanFCandRCMcombined.

2.2.2 Market context & category comparison

Inmanywaysthesediverseadoptiondynamicsarereflectiveofbroadermarkettrends,includingthescrambletobetterprotecteconomiesfromtheimpactofcollapsingfinancialinstitutions.Nowadays,financialfirmsarerequiredtodelivermoredatatomoreregulatorsthaneverbefore.Inpart,thishasbeenmandatedtosatisfyamuchwiderandmorecomplexsetofcapital-andscenario-basedstresstests,aswellaswavesofnewregulationoriginatingfromallcornersoftheglobalfinancialmarkets.Understandablythen,thecomplexsetofchallengesarisingfromthiswavehasdemandedthatfirmsexplorefreshtechnology-ledapproaches.Regulatoryreportingactivities,forexample,arenowwidelyacknowledgedtobeamajordriverofcompliancecostforfirms53.Theyencompasscomplexchainsofdatacollection,qualityassurance,consolidation,aggregationandintegrationprocesses.Asaresult,demandfor

53 TheBankofEnglandestimatesthatregulatoryreportingactivitycostsUKBanksaminimumof£2.0-4.5billionannually.Formoredetailssee:BankofEngland,“TheBankofEngland’sresponsetothevanSteenisreviewontheFutureofFinance”,July2019https://www.bankofengland.co.uk/-/media/boe/files/report/2019/response-to-the-future-of-finance-report.pdf

toolsthataddresselementsoftheregulatoryreportingvaluechainhavebeenrelativelybriskinrecentyears,whichmayhelptoexplainsomeofthevariationinresultsbetweencategories.

Highlevelsofadoptionarealsoevidentinthefinancialcrimespace,wherearapidlyrisingtideofidentitytheft,fraudandterroristfinancingactivityhasputfirmsonthehuntforsolutionstoprotectthemselvesandtheircustomers.Notonlyareinstitutionsexposedtothelossestriggeredbysuccessfulfinancialcrime,butalsotoanintangibleimpactontrustandreputation,aswellasthecostoffinesandsettlementsrelatingtopastcomplianceissues.Failuresinareassuchasmoneylaundering,sanctionsscreening,tradesurveillanceandwatchlistmonitoring,canbemanytimesmorecostlythanthedirectlossesincurredthroughfraud54.Andso,inthefaceofmaterialrisk,firmshavebeenswifttobolstertheirfinancialcrimedefenceswithnewtools.

Solutionsfordetectingbreaches–manypoweredbythelatestadvancesinartificialintelligence(AI)anddataanalytics–werebigbusinessevenbeforetheglobalpandemicsweptaroundtheglobein202055.However,COVID-19hasprovenitselftobeapotentaccelerantforthebuyingcycle.Indeed,iteffectivelyrewrotetherulesofglobalcommercealmostovernight,forcingwholepopulationstotakerefugeathometoavoidspreadingtheinfection.Thisinturnleftinstitutionslessabletoeffectivelymonitortheirstaffathomeandforcedmanyinexperiencedcustomerstograpple–sometimes for the first time –withserviceslikee-bankingandonlineshopping.Consequently,theattacksurfaceforfraudandfinancialcrimewasmassivelyexpandedin202056.Smallwonderthenthat78.8%ofvendorsservingthisboomingmarketsegmentreportedseeingmoderateorhighlevelsofengagementfrominstitutionalbuyerslastyear.

54 ArecentstudybyDuff&Phelpsfoundthattherewere20finesleviedintheperiodJanuarytoJune2020ofmorethan$1millionforinstitutionalbreachesconcerningmoneylaundering,sanctionsmonitoringandtaxevasion.Togethertheseincidentscosttheindustry$1,569millionhttps://www.duffandphelps.com/insights/publications/compliance-and-regulatory-consulting/global-enforcement-review-2020

55 AnOctober2019studypublishedbytheUK’sFinancialConductAuthority(FCA)foundthatmachinelearning–abranchofartificialintelligence–ismostcommonlyusedinareassuchasanti-moneylaundering(AML)andfrauddetectionhttps://www.fca.org.uk/publication/research/research-note-on-machine-learning-in-uk-financial-services.pdf

56 TheFinancialActionTaskForce(FATF)publishedastatementinApril2020relatingtotheimpactofthepandemiconlevelsoffinancialcrime.Inthestatement,theFATFwarnsthat:“Maliciousorfraudulentcybercrimes,fundraisingforfakecharities,andvariousmedicalscamstargetinginnocentvictimsarelikelytoincrease,withcriminalsattemptingtoprofitfromthepandemicbyexploitingpeopleinurgentneedofcareandthegoodwillofthegeneralpublicandspreadingmisinformationaboutCOVID-19”.https://www.fatf-gafi.org/publications/fatfgeneral/documents/statement-covid-19.html

https://www.bankofengland.co.uk/-/media/boe/files/report/2019/response-to-the-future-of-finance-report.pdf

https://www.bankofengland.co.uk/-/media/boe/files/report/2019/response-to-the-future-of-finance-report.pdf

https://www.duffandphelps.com/insights/publications/compliance-and-regulatory-consulting/global-enforcement-review-2020



https://www.fca.org.uk/publication/research/research-note-on-machine-learning-in-uk-financial-services.pdf






EXHIBIT 2.1

Spotlight on financial crime

Thedetailedresultsprovidedbyfinancialcrimesolutionvendors providevaluablecolourthroughoutthereport.FCvendorswerealsoaskedtoprovidetheirviewsonarangeoftailoredissuesrelevanttotheircategory(seeFigure2.2).

Onthetopicofcollaboration,thelargemajorityofFCvendors(81.5%)agreedthatpartnershipswerehappeningintheircategory,withbroadagreementthattheproblemsofAML,CTFandfraudweretoocomplexforonesolutiontotacklealone.However,resultsweremoremixedwhenitcametothetopicofAI.Forexample:

• Fewerthanhalf(48.2%)ofrespondentsagreedthatconcernsoverdatasharingwerethebiggestfactorholdingbacktheadoptionofAI-poweredFCsolutions

• Littleoverhalf(51.9%)feltthatutilisationofthelatestAItechniqueswasakeyfactorinthebuyer’sdecision.Furthermore,almostone-third(29.6%)disagreedwiththestatement

• Andagain,onthethemeofcooperation,almosttwo-thirds(61.5%)feltthatrecentindustrycollaborationsondatasharingwouldhelpdriveadoptionofAI-poweredsolutions

Thisthemeofcollaborationisonethatcarriedthroughintothebroaderfightagainstfinancialcrime.AsFigure2.3shows,themajorityofFCvendorssaidthatcross-industrycollaborationwasimportanttothefightagainstfinancialcrime,ofwhich40.7%regardeditas‘veryimportant’.

somewhatunimportant

3.7%

veryunimportant

7.4%

neutral14.8%

somewhatimportant

33.3%

veryimportant40.7%

Don’tKnow0%

Figure 2.3 FC views on the importance of industry collaborations to fight financial crime (n=27)Source: (bothfigures)UKRegTechVendorSurvey2020(CityofLondonCorporation/RTA)

Financial Crime RegTech vendors are increasingly forming partnerships, since the problems of money-launder-ing, terrorist financing and fraud are too complex for one solution to tackle alone.

Our clients would make greater use of AML/anti-fraud solutions that utilise artificial intelligence if they were less concerned about the security and privacy issues connected with data sharing.

When selecting a RegTech vendor to provide AML or fraud prevention solutions, clients look to firms whose systems make use of the latest artificial intelligence (AI) techniques.

Recent industry collaborations on data sharing will encourage more regulated institutions to use AML and anti-fraud solutions using artifical intelligence.

0 Perc

enta

ge

20

40

60

80

100

14.81%

3.70%

81.48%

14.81%

11.11%

25.93%

29.63%

18.52%

51.85%

7.69%

30.77%

61.54% 48.15%

Figure 2.2 Analysis of financial crime vendor perceptions (extract, n=27)

Question: To what extent do you agree with the following statements about RegTech for AML and Anti-Fraud use cases?


CASE STUDY

Spotlight on regulatory and compliance management

Assection2.3.1and2.3.2dealingwithsalesperformanceshow,RCMvendorsexperienced(andanticipated)alessbuoyantsetofsalesresultsintheyears2020and2021.Theseparatecategorydynamicsvaryforanumberofreasons,andtheresultsofthefocusedperceptionquestionputtoRCMvendors(seeFigure2.4)showthechallengestheyfeeltheyarefacing.

Forexample,almosttwo-thirdsofrespondents(65.0%)agreedthatitwasdifficultforinstitutionstomakeacompellingbusinesscaseforRCMinvestment,whileanidenticalproportionagreedtheirmarketwasdominatedbyincumbentvendors.Elsewhere,alittleoverhalfof

0 Percentage 20 40 60 80 100

All responses

Financial crime

Regulatory reporting

39.3% 25.9% 17.9% 14.3%

53.6% 25% 10.7% 10.7% 21.2

21.1% 26.3% 26.3% 5.3% 10.5% 10.5%

46.7% 26.7% 13.3% 13.3%

Regulatory and compliancemanagement

0 Percentage 10 20 30 40 50

Strongly positive

Somewhat positive

Neutral

Somewhat negative

Strongly negative

Don’t know/Prefer not to say

45%

25%

20%

0%

0%

10%

Figure 2.4 Analysis of RCM vendor perceptions (extract, n=20)Question: “To what extent do you agree with the following statements about RegTech for regulation and compliance management?”

Source:UKRegTechVendorSurvey2020(CityofLondonCorporation/RTA

Figure 2.5 RCM views on the impact of providing regulatory rules in a digital format on firms’ ability to manage regulation (n=20)Question: “What impact do you think providing all regulatory rules in a digital format will have on regulated firms’ abilities to manage regulation?”

Source:UKRegTechVendorSurvey2020(CityofLondonCorporation/RTA


RCMrespondents(55%)agreedthatRCMrespondents(55%)agreedthatregulatedfirmswerenotyetreadytointegratewithadigitally-enabledregulatoryframework,while40%agreedthepandemichadstimulatedadoptionofRCMsolutions,incontrastwithothercategories(see2.5.4and2.5.5).

DespitemostRCMrespondentsviewingFSIsasnotyetreadytointegratewithadigitally-enabledregulatoryframework,asignificantmajority(70.0%)feltthattheintroductionofdigitalruleswouldhelpthemtomanageregulationbetter.Indeed,almosthalf(45.0%)wouldviewsuchameasureas‘stronglypositive’.

2.2.3 Views on adoption from regulators & institutions

WhenaskedfortheirthoughtsonUKRegTechadoption,UK-basedregulatorsbroadlyagreedthatthesectorhadsomewaytogobeforeachievingahighlevelofmaturity.ThevendorecosystemthatexistsintheUKrightnowwasdescribedas‘highquality’.Institutionsarebelieved,by-and-large,tobeabletoselectfromawiderangeofbest-in-classcompliancesolutionstomeettheirneeds.However,anddespitetheopportunitiesavailable,thematurity57ofRegTechadoptionbyUKfirmsisstilllacking.Or‘basic’asdescribedbyoneleadingUKsupervisorybody.

57 Inthiscontext,theterm‘maturity’hastwodimensions:(1)thedepthofengagementwithvendors;and(2)theextenttowhichRegTechsolutionsareexploited.

ThisoutlookwasalsosharedbytheUKregulatedinstitutionsinterviewedforthisreport,allofwhomwereexistingusersofRegTech.Adoptionlevelswithinthisgroupdidnotappeartobe‘high’,sincemostoftheintervieweespointedto‘hotspots’ofadoptioninsidetheirorganisationsratherthanpresentingevidenceofdeeper,morestrategiclevelsofengagement.Forexample,solutionsforAMLandCTFwerepopularareasofinvestmentswiththisgroup,helpingthemplugimmediategapsincoverageandperformance.However,thereisconsiderableworktobedoneinother,lessimmediateareasofthecompliancestackifhighadoptionistoeverbeachieved.

A‘laundry-list’ofinternalandexternalbarriersthatholdbackwiderRegTechadoptionwereofferedbyregulatorsandregulatedfirms.These,togetherwiththoseevidencedinthevendorsurvey,areexploredinmoredetailbelow.However,aclearandunambiguouspictureofRegTechadoptionbyUKFSIsisalreadyemerging.ThereisarealmarketopportunitytodeepenandbroadenthegrowthoftheRegTechindustryintheUK.Thereisalsoastrong,distributedecosystemofvendorsabletohelpinstitutionstooptimisetheirinfrastructureandachievebettercomplianceoutcomes.However,therelativesuccessofRegTechs,atleastinrecenttimes,iscloselytiedtothecategoriestheyoccupyandtheengagementofbuyers.Fornow,atleast,muchofthatengagementhasbeenconcentratedonaddressingarangeofimmediate,urgentneeds.Asaresult,RegTechinnovationislargelydeployedtactically(i.e.toplugholes)ratherthanstrategically(i.e.toimproveoverallstandardsof

0 Percentage 20 40 60 80 100

All responses

Financial crime


39.3% 25.9% 17.9% 14.3%

53.6% 25% 10.7% 10.7% 21.2

21.1% 26.3% 26.3% 5.3% 10.5% 10.5%

46.7% 26.7% 13.3% 13.3%


Figure 2.6 RegTech solution sales to financial services clients, 2020 vs 2019 (n=112)Question: “How have UK sales of your RegTech solutions in the financial services sector performed in 2020 compared with 2019?”

Source: UKRegTechVendorSurvey2020(CityofLondonCorporation/RTA)


compliance).Encouragingfirmstoturnthedialtowardsthelatterisakeypartofaddressingthisadoptionchallenge,withstrategicengagementpromisingaroutetosustainable,beneficiallong-termcommercialrelationships.

2.3 UK RegTech sales performance

2.3.1 In-year sales performance, 2019-20

Inthecontextofthesemanychallenges,onemightexpecttheRegTechssurveyedforthisstudytobepessimisticabouttheimmediateoutlookfortheirbusinesses.Yetthiswasnotthecase,andinstead,mostrespondentsexpectedtochalkupstrongUKsalesgrowthin2020.

AsFigure2.6(nextpage)shows,almosttwo-thirdsofvendorssurveyed(65.2%)reportedariseinsolutionsalesin2020.Ofthese,39.3%saidsaleshadrisen‘strongly’(i.e.growingbymorethan10%year-on-year).Conversely,a very smallproportionofvendors(3.6%)believedtheirsaleshadshrunkin2020,ofwhich2.7%reportedasharpdeclineofmorethan10%vs.2019.Elsewhere,17.0%sawnochangeyear-on-year,whileafurther14.3%claimedeithertheydidn’tknowhow2020hadgoneorotherwisewouldn’tbedrawn.

Aswithadoption,therearestarkcontrastsbetweencategoriesinthisthemetoo,withFCvendorspresentingamuchmorebuoyantviewoftheirperformanceinthepastyear.Anaboveaverage78.6%ofrespondentsinthiscategory

experiencedgrowthin2020,withmorethanhalf(53.6%)seeingstronggrowthofmorethan10%.RRvendorssharedtheirpositiveoutlook,with73.4%enjoyinggrowth,andnohintofdeclineonthecardsforvendorsineithertheRRorFCcategories.Incontrast,only47.4%ofRCMvendorsexperiencedsalesgrowthlastyear,ofwhichonly21.1%sawstronggrowth.Moretellingly,15.8%ofRCMvendorssawtheirsalesnumbersfallin2020,morethanfour-timesthesurveyaverageof3.6%.

2.3.2 Forecast sales performance, 2020-21

AsFigure2.7shows,thismixedoutlookwasalsoreplicatedinvendors’2021forecastsforUKRegTechsales,albeitwithagenerallymorepositiveoutlookandwithsomewhatlesspronounceddifferencesbetweencategories.

Alargermajorityofvendorsthistime(82.3%)expectedsalestogrowin2021,withmorethanhalf(60.2%)predictingstrongsalesgrowthofmorethan10%intheyearahead.Incontrast,fewerthan1%anticipatedadeclineinthesameperiod,andagainthetelltaledifferencesbetweenRegTechcategoriesareevident.

Nearlyall(92.9%)ofFCvendorspredictedgrowthin2021,withalmosttwo-thirds(64.3%)expectingthatgrowthtobestrong(i.e.,greaterthan10%).Incontrast,75.0%ofRCMvendorspredictedthesameoutcomein2021,withRRvendorssharingthesamemoremutedoutlook,with73.3%predictinggrowth.However,liketheirFC

0 Percentage 20 40 60 80 100

All responses

Financial crime


60.2% 22.1% 3.5% 0.9% 13.3%

64.3% 28.6% 7.1% 21.2

55% 20% 5% 5% 15%

53.3% 20% 13.3% 13.3%


Figure 2.7 Forecast RegTech solutions sales to financial services clients, 2021 vs 2020 (n=112)Question: “How do you expect UK sales of your RegTech solutions in the financial services sector to perform in 2021 compared to 2020?”



colleagues,RRvendorsdidnotexpectsalestodeclineeither.ThiscontrastswithRCM,where5%predictedastrongdecline.

Overall,theseareconfidentforecastsand,iftheyarerealised,theybodeextremelywellforthenear-termfinancialhealthoftheUKRegTechsector.Withanumberofinternalandexternalfactorsrangedagainstthem,vendorscantakenothingforgranted.Gapsincompliancecoveragebeingpluggedtodaymaynotrequirerepluggingforsometime.Andso,thequestionishowtoidentifyandaddressthebarrierstolong termUKRegTechadoptionsotheycanbeminimisedoreliminated?Inthisway,atrulysustainablefuturecanbechartedforUKRegTech,onebasedonstrategicengagementratherthantacticalfirefighting.


2.3.3 Overview of adoption barriers

TobetterunderstandthebarrierstoUKRegTechadoption,theresearchteamatRegTechAssociatesdrewontheirknowledgeofRegTechanddeepdomainexpertisetodevelopacomprehensivelistofpossible 19potentialbarrierfactorsholdingback theadoptionofRegTechbyUKinstitutionsshowninExhibit2.3.

EXHIBIT 2.3

Internal and external barriers to the adoption of RegTech

INTERNAL FACTORS(i.e.factorsdrivenfromwithinbuyerinstitutionsthemselves)

1. Constraintsimposedbylegacytechnology

2. DifficultiesofintegratingRegTechsolutions intoexistingtechnologystacks

3. Difficultiesofnavigatinginternaldecision makingprocesses

4. FearofaRegTechprojectnotmeetingitsobjectives

5. Lackofavailablebudget(forRegTechprojects)

6. Lackofavailablestaffwiththerightskills

7. Lackofboardroomsupportforinvestment inRegTech

8. Lackofbuyereducation/awarenessaround availablesolutions

9. Longprocurementcyclesinbuyingorganisations

EXTERNAL FACTORS (i.e.factorsdrivenbythewidermarketenvironment)

10.Competitionfromothersolutionproviders

11. Highcostofavailablesolutions

12. ImpactofCOVID-19pandemiconclientappetite

13. Lackofadigitally-enabledregulatoryframework

14. Lackofadoptionofcloud-basedsolutions

15.Lackofavailablesolutionsthatmeettheneedsofbuyers

16.Lackofdatastandardsandinteroperability

17. Rapidspeedofdomestic/globalregulatorychange

18. ReluctanceoftheregulatortopromoteRegTechsolutions

19.UncertainUKeconomicoutlook

SurveyrespondentswereinvitedtovoteforthefactorstheyfeltrepresentedthemostpressingandseriousbarrierstoRegTechadoptionbyUKFSinstitutions.And,toensurethatnothingcriticalwasmissed,afurtheroptionwasincludedforvendorstoproposetheirownbarriersinafree-textfieldshouldtheynotfindonetheywerelookingforinthelistprovided58.

58 Wenotethatnoneofthesurveyrespondentsexercisedthisoption,selectingonlyfromthelistof19barrierfactorsprovided.


2.3.4 Barrier analysis

Table2.1showshow101ofthe125qualifyingvendorsinoursurveyvotedwhenpresentedwithalonglistofpotentialbarrierfactors.Intotal,thegroupcast688votes(anaverageof6.8votespervendor).

Rank 59 Factor Type No of votes

% of votes (n=688)

% of sample (n=101)

1 Longprocurementcyclesinbuyingorganisations Internal 74 10.8% 73.7%

2 Lackofbuyereducation/awarenessaroundavailablesolutions Internal 68 9.9% 67.1%

3 Difficultiesofnavigatinginternaldecisionmakingprocesses Internal 59 8.6% 58.6%

4 Constraintsimposedbylegacytechnology Internal 51 7.4% 50.1%

5 Lackofavailablebudgetwithinfinancialinstitutions Internal 50 7.2% 49.1%

6 DifficultyinintegratingRegTechsolutionsintoexistingITstacks Internal 47 6.8% 46.3%

7 LackofboardroomsupportforinvestmentinRegTech Internal 40 5.8% 39.7%

8 ReluctanceoftheregulatortopromoteRegTechsolutions External 38 5.6% 37.8%

-9- Lackofdatastandardsandinteroperability External 36 5.3% 35.9%

-9- Lackofadigitally-enabledregulatoryframework External 36 5.3% 35.9%

11 FearofaRegTechprojectnotmeetingitsobjectives Internal 33 4.9% 33.0%

-12- Lackofavailablestaffwiththerightskills Internal 27 3.9% 26.4%

-12- ImpactofCOVID-19pandemiconclientappetite External 27 3.9% 26.4%

-12- UncertainUKeconomicoutlook External 27 3.9% 26.4%

15 Lackofadoptionofcloud-basedsolutions External 25 3.6% 24.6%

-16- Competitionfromothersolutions External 17 2.5% 17.0%

-16- Rapidspeedofdomestic/globalregulatorychange External 17 2.5% 17.0%

18 Highcostofavailablesolutions External 9 1.3% 8.5%

19 Lackofavailablesolutionsthatmeettheneedsofbuyers External 8 1.1% 7.6%

59 Duplicativerankingnumbersindicateequalnumbersofvotesforthoseoptions,leadingtothembeingtiedintheoverallplacings.

Sinceanybarrierwithmorethan7.4%60ofthetotalvotescastisattributabletoamajorityofrespondents,theseresultsareimmediatelyremarkablefortworeasons:

60 Calculationbasedonthepercentageofvotescast(n=688)equivalenttoamajorityofthesurveysampleforthisquestion(n=101).Sincethemajorityofrespondentswouldbe51of101,wecansaythemajoritythresholdwouldbe51÷688=7.4%.

Table 2.1 Ranking of barriers to adoption, based on votes cast by survey respondents (n=101)Question: “Which of the following factors do you regard as the largest barriers to greater RegTech adoption in the UK?”

Source: UKRegTechVendorSurvey2020 (CityofLondonCorporation/RTA)

• Firstly,nearlyalloftheTop5barriersselectedwerevotedforbyamajorityofrespondents,indicatingahighdegreeofconsensusaroundtheresults

• Secondly,alloftheTop5barriersonthelistwere internalfactorsrelatingtothebuyersthemselves

60 Duplicativerankingnumbersindicateequalnumbersofvotesforthoseoptions,leadingtothembeingtiedintheoverallplacings.


0 Percentage 2.5% 5% 7.5% 10% 12.5%

Long procurement cycles in buying organisations

Lack of buyer education/awareness around available solutions

Difficulties of navigating internal descision making processes within financial institutions

Constraints imposed by legacy technology in financial institutions

Lack of available budget within financial institutions

Difficulty in integrating RegTech solutions into financial institutions’ existing technology stacks

Lack of boardroom support for investment in RegTech

Fear of a RegTech project not meeting its objectives

Lack of available staff with the right skills

Reluctance of the regulator to promote RegTech solutions

Lack of data standards and interoperability

Lack of a digitally-enabled regulatory framework

Impact of COVID-19 pandemic on client appetite

Uncertain UK economic outlook

Lack of adoption of cloud-based solutions

Competition from other solutions

Rapid speed of domestic/global regulatory change

High cost of available solutions

Lack of available solutions that meet the needs of buyers

10.8%

9.9%

8.6%

7.4%

7.2%

6.8%

5.8%

4.9%

3.9%

5.6%

5.3%

5.3%

3.9%

3.9%

3.6%

2.5%

2.5%

1.3%

1.1%

Internal FactorsExternal Factors

Figure2.8showsthesplitbetweeninternal andexternalfactorsmoreclearly,illustratinghowthe688‘votes’castbytherespondentsweredistributedacrossthe19optionstheyweregiven.

ItisstrikingthatmostvendorswhoansweredthisquestionconsideredthebiggestbarrierstoRegTechadoptionbyUKinstitutionstobenativetotheinstitutionsthemselves.Theseinternalfactorspertainedtothebuyers’processes,resources,capabilitiesandtechnologyinfrastructures.Forexample,alittlelowerdownthetable,morethanone-thirdofrespondents(39.7%)pointedtoalackofboardroomsupportforinvestmentinRegTech,whileaslightlysmallerproportion(32.7%)calledoutfearoffailureasamajorbarriertoadoption,astaplechallengewithmostinnovationprojects.

Figure 2.8 Largest perceived barriers to RegTech adoption by UK institutions (individual responses = 688Question: “Which of the following factors do you regard as the largest barriers to greater RegTech adoption in the UK?”



2.3.5 Overview of results in spotlight categories

TakingamomenttoreviewthetrendsacrossdifferentRegTechareas,asFigure2.9belowshows,thetrendacrossthefocuscategoriesofFCandRCMisbroadlyinlinewithaverage.However,whileneithercategorystraystoofarfromthemean,thereareneverthelesssomenotabledifferences,underliningthedifferentpressuresexerteduponeach.

Forexample,intheFCsolutioncategoryanaboveaverageproportionofvendorsvotedinlinewiththetopsixbarrierstoadoptionidentifiedinthesurvey,broadlyadheringtothewiderpatternofconcerns.However,theywerealmostthree-timesmorelikelytoraiseconcernsabouttheavailabilityofsolutionsmeetingtheneedsofbuyers,andseeminglyalsofelttheheatofcompetitionmorefiercelythanothercategories.Conversely,thisgroupwasnoticeablylessconcernedaboutdatastandardsandinteroperability,aswellasthespeedofregulatorychangeandthecostofsolutions.Interestinglytoo,noneofthe203FC‘votes’recordedinthesurveyrelatetothepandemic,whichwasclearlythennotregardedasasignificantbarrier.

Elsewhere,intheRCMsolutioncategory,whilebuyerawarenesspippedprocurementcyclesforthenumberonespotwithvendorsinthebarrier‘leaguetable’,theyotherwisebroadlyfollowedtheherd.Nevertheless,factorssuchasthelackofbuyerawarenessofnewsolutionsandlackofboardroomsupportdrewanoticeablylargerproportionofvotesfromRCMrespondents.Inaddition,fearoffailure,solutioncostsandtheCOVID-19pandemicweremuchmorepressingconcernsforthisRegTechcategorythantheaverage.Interestingly,RCMvendorswerealsoproportionallylessconcernedaboutthemarket’suptakeofcloudtechnologies,datastandardsandinteroperabilityinasimilarwaytotheirFCcolleagues.

2.3.6 External barriers to adoption

Whileinternalbarriersdrewthemajorityofvotesfromthevendorssurveyed,morethanone-thirdofrespondentsalsocalledattentiontosomeimportantexternalbarrierstoUKRegTechadoption.

TheTop3externalbarrierswere:

1. ThereluctanceofregulatorstopromoteRegTechsolutions(37.8%ofrespondents)

2. Thelackofdatastandardsandinteroperability(35.9%ofrespondents)

3. Thelackofadigitally-enabledregulatoryframework(35.9%ofrespondents)

Theseareespeciallyrelevantforthisstudy,sinceexternalfactorswilllikelyrespondmoreeffectivelytonewpolicymeasures.Theymayalsoinfluenceinternalfactors(e.g.clearerstandardsmakingthecaseforRegTechinvestmentclearerforboards).Yetthesefindingsalsoposesomeuncomfortablequestions–aboutthewayinstitutionsinteractwithRegTechsuppliers,abouthowtheyaregeareduptoonboardandmetaboliseinnovation,andabouttheextenttowhichregulatorsfeeltheycanandshoulddomoreto‘bangthedrum’forRegTech.

2.3.7 Views of institutions on barriers to adoption

Theresultsofthequalitativeinterviewsprovideausefulopportunitytovalidatevendorperceptionsandputsomeadditionalcolourtothem.Tobeginwith,duringthecourseoftheinterviews,itsoonbecameclearthatmanyofthebarrierscalledoutbyvendorsresonatedstronglywithinstitutions.However,asmightbeexpected,focusandintensitywerebothsomewhatdifferentfromtheperspectiveofRegTechbuyers.

Intheareaofprocurementandbuyerawareness,forexample,thefactthatlarge,complexorganisationshavecomplicatedsupplieronboardingprocessesshouldnotbenewstovendors.However,thisfactisaparticularproblemforRegTechs,andinstitutionsdidacknowledgethatinflexibilityaroundwhotheycanorcannottradewithhasthepotentialtochokeoffaccesstoinnovation.Makingacaseforaninnovativenewproviderwasalsodifficultiftheissuesatplaywerenotwellunderstoodoutsideafirm’scompliancecommunity.Indeed,giventhestiffcompetitionforresourcesatmostfirms,intervieweesrepresentingtheircomplianceandinnovationfunctionsexplainedhowtheysometimesmissedoutonfundinginfavourof‘sexier’revenue-generativeactivitiesinthefrontoffice.However,thisisnotjustacaseofcomplianceinvestmenthavingan‘imageproblem’.Therearetrustfactorstobeconsideredheretoo.

Forexample,timeandagainthroughinterviewstheviewwasofferedthat“nobody ever lost their job for hiring X”,whereXwasthenameofanyoneofhalfadozenlarge,


well-knowninternationaltechnologygiants.Inshort,thetrustthatcomeswithaproventrackrecordofdeliveryandthesensethatavendorhasthescaleandresourcestoswiftlyresolveanytrickypost-implementationissueoftentipsthebalanceintheirfavour.Andthiswasironicconsideringtheotherviewvoicedinvariouscornersthatlargeproviderstypicallyprovednottobe“...as innovative as they seemed to be” oncetheimplementationwascomplete.Settingasidetheparadoxofselectinglessinnovativevendorstodrivemoreinnovationintoyourbusiness,whilethisdesireto‘playsafe’continuestotrumpthepotentialbenefitsofengagingwithnewanduntestedsolutionsfromsmallerproviders,theadoptionofRegTechwilllikelycontinuetobesuppressed.

2.3.8 Views of institutions on budget availability

Elsewhere,onbudget,institutionsbroadlyagreedthatsecuringfundingcouldbechallenging,particularlyatatimeofeconomicuncertainty.Someofthefirmsinterviewedhadalreadyseentheirdiscretionarybudgetswithdrawn,puttingmuchoftheirRegTech‘experimentation’onhold,atleastinthenearterm.Asmentionedalready,budgetacquisitionisafarlesschallengingproblemwhenthebusinesscaseconcernsrevenuecreationorthepluggingofanimmediategapincompliancecoverage.

However,infocusingsolelyonrevenue-relatedandnarrow,tacticalconsiderations,firmsconcededtheywerealsosurrenderingtheopportunitytotakeamoreholisticandstrategicapproachtotheircompliancetechnologyprovisionaswellasthecompetitivebenefits61. SuchtacticalthinkingisakeyfactorinfluencinguptakeofRegTechtools,andonethatcutsacrosstheissuesofawareness,educationandunderstanding.Indeed,insomecasesalackofperceivededucationaroundcompliancetechnologywasfelttobebehindalackofengagementbyboardswithRegTechprojects.Inmanyinstances,thebusinesscasesforsuchprojectstypicallyhingeontwospecificelements:

1. Promisedimprovementstoexistingcomplianceprocesses(e.g. more, faster, better...)

61 Forexample,in2020theFCApublisheditsfirstcomparisonofUKbanks’fraudcontrols.Theintentionwastoallowconsumerstobeabletocomparehowbanksprotectedthemagainstfraud,and“...tomakebetterinformedchoicesabouttheirbankingproviders”.FormoredetailsseetheFCAwebsite:https://www.fca.org.uk/data/banks-fraud-controls-comparison

2. Savingsoftimeandmoneyfortheinstitution(e.g. staff costs, IT costs, enforcement costs...)

Validatingtheviewthat‘revenuerules’whenitcomestoinvestmentdecisions,severalintervieweesexplainedthedifficultytheyfacedintryingtoproveanegative(e.g. the fines we WON’T pay, the money we WON’T spend).OneintervieweeevenexpressedtheviewthatrequestsforRegTechbudgetweremorelikelytoelicit‘groans’fromdecisionmakersthantheresourcecommitmentstheywereanglingfor.

However,thisproblemisnotsolelyattributabletoRegTechprojects’reputationasexercisesincostsavingratherthanmoneymaking.Anotherkeyfactordrivingboards’reticencetoinvestincomplianceprojectsisanattitudedescribedbyoneintervieweeas“...if it ain’t broke, why fix it?”. Inotherwords,whydivertscarcebudgettoaprojectthatenhancesaprocessthatisalreadyworking?

Theperceivedtoleranceofregulatorsfor‘clunkier’methodsofcompliance(e.g.spreadsheetbasedreporting)andtheirhesitationtochampiontheroleoftechnologyleavesmoretobedonetodrivehomethevalueofcomplianceoptimisation.Indeed,bymakingmorenoisearoundthebenefitsofRegTech,andbyraisingthebarofexpectationbyactivelychampioning‘bestpracticecompliance’,regulatorscouldhelpmoreorganisationsgraspthenettleandtransformoutdated(albeitpermissible)legacyprocesses.However,awarenessalsohasaroletoplayheretoo.Suchapathytowardsanythingotherthanurgentcompliancechangehasasmuchtodowithignoranceasitdoeswithvision.Andthisisfortunate,sincethisisanotherareawhereincreasingawarenessaroundthefundamentalvaluepropositionofRegTechcouldcertainlyhelpmovetheneedlepositivelyonadoption.

2.3.9 Views of regulators on barriers to adoption

Turningagaintothedetailedinterviewsconductedwithglobalregulators,thereisgoodevidencethattheeducationandawarenessgapshighlightedabovearenotrestrictedtoUKRegTechs.Indeed,thefundamentalsofarticulatingtheRegTechvalueproposition–and even of explaining what RegTech actually is–arechallengesseeminglyfacedbyvendorstheworld over.

ThoseinterviewedforthisreportbroadlyagreedthatRegTechadoptionintheir

https://www.fca.org.uk/data/banks-fraud-controls-comparison

https://www.fca.org.uk/data/banks-fraud-controls-comparison


jurisdictionshadroomtogrow.Whetherdescribedas“patchy”,“low level” or “in its infancy”,regulatorsfromvariousjurisdictionsagreedthatRegTechadoptionremainspredominantlyamatterofaddressingvulnerabilitiesandacquiringmandatedfunctionality.Thisalsoechoesviewsvoicedinthevirtualvendorroundtablesaswellasinterviewswithinstitutions.Inshortthen,thisisnotaUK-specificchallenge.

TherewasalsobroadagreementthatawarenessaroundRegTechwasamajorbarriertoadoption–notenoughisknownintherightplacesaboutwhovendorsare,whatsolutionstheyoffer,andhowRegTechitselffitsintothewidertechnologypictureforinstitutions.OneregulatoryintervieweeexplainedtheirregretathavingpubliclydescribedRegTechasasubsetofFinTech.Acknowledgingthatonewasnotpartoftheother–especially since RegTech tools can be utilised in a range of non-financial contexts, including in the oil & gas and telecommunications industries–theyfeltthismisconflationhadaddedtothebroaderconfusionaroundRegTech.

Elsewheretoo,otherintervieweesnotedthatignorancearoundRegTechwasarisk,onethatledinstitutionstomissoutonvaluableopportunitiestocapitaliseoninnovationandenhancetheirstandardsofcompliance.Likewise,small,innovativevendorswithbrightideasandthelatesttoolswereheldbackfromgreatersuccess.Importantlythough,thiswasnotanendorsementofRegTechadoptionforadoption’ssake.Rather,asseveralintervieweesputit“...we want to see more good RegTech”,meaningrobustsolutionsthatdelivertrueefficiencyandenhancethequalityofcompliance.

2.3.10 RegTech vendors’ understanding of regulators’ mandates

Ofequalimportance,wastheviewthatthelackofawarenessthatexistsintheindustrycutsinmorethanonedirection.Forexample,oneregulatorcomplainedthatsomeoftheRegTechstheyhadmetthroughtheirinnovationprogrammehadonlyengagedwiththemtomeetnewpotentialclients.Asoneintervieweequipped,“Regulators are not dating agencies”,andtomakethebestuseofavailableresources,allpartiesneedtoengageintherightwaywiththeopportunitiesavailabletothem.

Converselythough,itisimportantthatsupportmeasuresforRegTechsproperlyreflecttheir

needs.Forexample,itemergedthroughthevendorroundtablesessionsthatseveralhadfounditdifficulttoengagewithsomeoftheearlyregulatorysandboxes.Atthattime,andgearedmoretowardsFinTechs–who undertake regulated financial services activity themselves–suchsandboxeswouldoftenrequireRegTechstoseekarecommendationfromaregulatedclienttosecuretheirentry.Thiswasoftenveryhardtoobtaininpractice,andsorecentmovesbyregulatorssuchastheUK’sFCAtopilotanewbreedof‘digitalsandboxes’inpartnershipwiththeCityofLondonCorporationareverywelcomeindeed,helpingtoaddressthismismatchinprovision.

2.3.11 Views of regulators on board apathy towards RegTech

Elsewhere,regulatorsalsorecognisedthattheapathyseentowardscompliancetransformationwasonlyreinforcedbytheintenseriskaversionofboards62.Thereare,necessarily,highstakesattachedtotechnologyinvestmentincompliance,sothetraditionalinnovationmaximof“fail fast, fail often”canunderstandablybedifficultforboardstoembrace.However,newsolutionsmustalwaysberunintandemwithexistingsystemsforaconsiderabletimebeforetheirefficacyisdeemedtobeproven.Thisthenrendersitmoreaquestionofriskappetitethanriskmanagement.

Importantlytoo,someregulatorsfelttheirhandsweretiedwhenitcametosayinganddoingmoretosupportRegTechadoption.Insomecases,regulatorsdescribedfeelingpressuretoremain‘technologyneutral’,avoidingshowingfavourtoonespecifictechnologyor(worsestill)oneparticularvendor.However,thisisnotnecessarilyabinarychoiceforregulators,andthereisperhapsroomtochartamorebalancedcoursebetweenfearandfavourthatwouldallowthemtomeettheirmandatedobjectiveswhilstalsoresettingexpectationsandallayingfearsinthemarket.Therewasaclearappetitetotakestepsinthisdirectionfromtheregulatorinterviews,andmuchthatcanbelearnedfromotherglobaljurisdictionsinthisregard.

62 Asamatterofrecord,UKbankshavebeenrequiredtopayoutmanymillionsofpoundsinconnectionwithITfailures,bothinconnectionwithlegacysystemscollapsesaswellasproblematictransformationprojects.Forexample,inNovember2014RBSwasfined£42millionbytheUKFinancialConductAuthority(FCA)forawellpublicisedsystemsfailurethatresultedinmillionsofretailcustomersbeingoutoftheiraccountshttps://www.fca.org.uk/news/press-releases/fca-fines-rbs-natwest-and-ulster-bank-ltd-%C2%A342-million-it-failures

https://www.fca.org.uk/news/press-releases/fca-fines-rbs-natwest-and-ulster-bank-ltd-%C2%A342-million-it-failures




OneAsianregulator,forexample,hastakenanactiveroleinsupportingtheengagementoffinancialinstitutionswithRegTech.ThisincludeddevelopingcloselinkswiththeirlocalFinTechassociationtocoordinateactivityandrunevents,aswellasestablishinggrantsforinstitutionstohelpthemdeveloptheinfrastructureneededtoadoptnewtechnologies.Meanwhile,anotherinNorthAmericahasusedcompetitionstopromoteandrewardnewinnovation,aswellashostingavirtualroadshowthatconnectsinnovatorswithinstitutionsundertheirownbanner.

Equally,thereisvaluableprecedentforamoreinterventioniststancefromregulatorsclosertohome.Oneinstitutionalinterviewee,forexample,recalledbeingencouragedbytheUKregulatortolookatenhancedtradesurveillancetechnologyaheadoftheimplementationoftheEuropeanMarketAbuseDirective(MAD).So,itcanbedone.However,despitethecleardesiretodomore,thelinebetweenwhattheyshouldandshouldnotbedoingtosupportRegTechisnotsettled,contributingafurtherbarriertoitsadoption.Clarityisneeded.

2.3.12 Other barriers arising from the research

UrgentactionisneededtoclosetheawarenessgapthatexistsaroundRegTechandtoaddresstheotherbarrierstoadoptionidentifiedby thisreport.Theseincludesomeadditionalbarriersnotcalledoutdirectlybyvendors,butwhichcroppedupininterviewswithregulatorsandinstitutions.

Importantly,thereareanumberofvendor-focusedfactorsthatpresentasbigachallengetothesuccessofthesectorasthosebarriersidentifiedbythevendorsthemselves. Theseinclude:

• Willingness to collaborate:SeveralinstitutionsnotedthelackoftractiontheygotfromRegTechs–particularly the larger players–whotheyfoundunwillingattimestograpplewiththeiruniquerequirements.Oneinstitutiondiscussedbeingrebuffedbyavendorwhentheyaskedtoprovideinputintotheirproductroadmap.Theintentionhadbeentohelpthevendorbetterunderstandthefast-changingneedsoftheirclient–a rapidly growing European neobank–toincreaseboththevalueofthesystemandthelikelihoodofarenewal.Thebankhadalsofounditconsistentlydifficulttogetpost-implementationtweaksmadeto

criticalsystems,whichwasamajorsourceoffrustration,andonethatcouldimpactfuturevendorselection.

• Scalability & maturity:Ironically,smaller‘start-up’-stylevendorswereoftenheldtobemuchmoreresponsivetothissortofapproach.However,asalreadynoted,theabilityinstitutionshavetoengagewithsmallerRegTechplayerscandiminishastheirsize,footprintandcomplexitygrow.Allofwhichleavesinstitutionscaughtonthehornsofascaledilemma.Partly,thisisthefunctionofwhatwasdescribedbyoneinstitutionas‘naivety’onthepartofvendorsthemselves.Inseveralcases,firmsdescribedhavingbeenpresentedwithinnovativenewproductsdesignedforspecificjurisdictions,onlytofindtheycouldnotsatisfyapredictablymuchbroadersetofneeds.Forexample,atradesurveillancesolutionunabletomanagemulti-languageinputsthatwouldbeoflittleusetoalargeinstitutionwithtradingdesksonallcontinents.Insuchcases,institutionswouldlikevendorstothinkmoreaboutwhattheyneedratherthansimplyattempttoadaptabrilliantideathatclearlyrequiresmoretimeindevelopment.However,thisisofcoursenotpurelyaresultofnaivety.Rather,theseresultsindicatethatvendors–especially the 20.5% surveyed for this report with fewer than 5 customers–needurgenthelptoscale.

• Interoperability:Anotherkeychallengewasinteroperability.While43.6%ofvendorsacknowledgedthatintegratingwithclientITwasabarriertoadoption,therewasaclearsensefrominstitutionsthatvendorscoulddomuchmoretoworkwiththeirclientstoamelioratethis.Forexample,manyfirmsaretransitioningawayfrommonolithic‘onpremise’technologiesinfavourofmoreflexible,cloud-basedenterpriseplatformsforcomplianceIT.Insuchcases,theproblemsofintegrationarerarelyinsurmountable,butinstitutionsfelttheyoftenhadtowaittoolongforpatchesandupdatestobereleased,eventakingmattersintotheirownhandswhereneeded.

• The reliance on ‘homebrew’ development:OneUKfinancialinstitution,forexample,wearilyoutlinedtheir‘80/20’approachtoRegTechimplementations.Intheirview,thelast20%ofanycompliancetechnologyprojectsignedoffbymanagementwouldinevitablyrequiretheirin-houseteamofprogrammersanddeveloperstostepin


andeffectively‘inventthelastmileofroad’tocompletetheproject.Giventhescarcityandcostofdevelopertalentinthisarea,the80/20routeisclearlynottheidealapproachtoRegTechadoption.However,asseveralinstitutions-acrossbanking,insuranceandassetmanagement-explained,tovaryingdegreesa‘homebrew’developmentapproachwasentirelynecessaryandappropriatewhenvendorsfailedtoengagewiththem.Thisviewalsoextendedtothefunctionalityandflexibilityofsystems.Insomecasesfirmsreportedhavingtodeveloptheirowntools,sincethoseavailableinthemarketwereunabletocatertotheirneeds.Foroveralllevelsofcompliance,itisobviouslybetterforfinancialinstitutionstobeinnovatinginternallythannotatall.

• Trusting smaller vendors:Elsewhere,concernswerevoicedovertheresilienceandlong-termfutureofsmallerfirms.Knowingthatthevendorselectedforabigticketcompliancetechnologyprojectwilllikelybetradingforthemedium-andlong-termisimportanttobuyers.Thisisparticularlytrueincaseswherefirmsdonotreviewtheircontractsfortwo-orthree-yearsatatime.Nocomplianceteamwantstofinditselfhavingtorenegotiatewithanewownerorbefacedwithanunexpected‘cliffedge’inserviceprovision.Addedtothisisthenaturalproclivityofinstitutionstofavourfirmswhocanbereliedoninacrisis.Beingabletoshowthatyoucanget‘bootsontheground’ifanintegrationgoesbadlyisadifferentiatingfactorforrisk-aversebuyers,andgiveslargertechnologyhousesa naturaladvantage.

Consequently,anopportunityexiststodomore,bothtosupportthelongtermgrowthandsustainabilityofinnovativeRegTechs,andtochallengethelowtechnologyriskappetiteofinstitutionsholdingbackcomplianceinnovation.Moreover,thereisaclearneedtoincreaseawarenessacrossalldimensionsoftheimmediateRegTechstakeholderecosystem– the vendors, the buyers and the regulators – toensurecloseralignmentbetweenthem,greaterconfidencetoadoptnewcompliancetechnologiesandbetteroutcomesforallparties.

2.4 The impact of COVID-19

2.4.1 Impact of the pandemic on UK RegTech adoption

Atthebeginningof2020,whilefirmsandvendorswerebusygrapplingwiththebarrierstoadoptionhighlightedintheprevioussection,theCOVID-19pandemicarrived.Itbroughtincrediblechallengesandhardshipstocommunitiesinallcornersoftheglobe.Besidesthedreadfulhealthtollthevirushastaken,ithasalsostructurallychanged–atleastfortheshortterm–thewaysinwhichpeoplelivetheirlives.Oneoutcomeofthisglobalrictushasbeenavirtualstampedeintoonlineenvironmentstowork,tosocialise,toshop,andtoaccessfinancialservices.And,ashasalreadybeentouchedon,theresultingexplosionofonlineinteractionshasmassivelyamplifiedtherisksforinstitutionsandthecustomerstheyserve.

Againstthisbackdrop,COVID-19hascreateda‘perfectstorm’ofchallengesforfinancialfirms.Thefinancialcrimeinvestigatorsemployedbyinstitutionshavehadtoadapttoworkingandcollaboratingoncasesvirtually.Atthesametimefraudincidentshavespiked,drivenbytheexodusofnewusersontodigitalchannels,whichhaveopenedupnewavenuesofattackforcriminals.Hence,ifyourbusinessistoprovidesolutionsthathelpfirmstoidentifyanddealwithincidentsfasterandbetter,thepandemiccouldbesaidtohavesignificantlyboostedyourfortunes.

2.4.2 Impact of the pandemic on different RegTech segments

However,financialcrimesolutionprovidersarenottheonlypotentialbeneficiariesofa‘pandemicdividend’.Indeed,intervieweesatinstitutionsandregulatorsbothdescribedarapidaccelerationoftechnologyinvestmentinfinancialservices.Asthedemandsofnewlydigitalcustomerschangedthegame,institutionsfranticallyrampedupmovestocompletecriticaldigitaltransformationprojects.

Also,asnotedearlierinthereport,someRegtechcategories,suchasFCandRR,seeminglyfaredbetterthanothers.However,asthebroadlyoptimisticoutlookofUKRegTechsshows,most(ifnotall)boatshaveliftedonthisrising,albeittemporarytide.Nevertheless,otherfactorsmayalsohavedriventherisingfortunesofthesefirms,andtogetaclearpictureoftheexperienceofUKRegTechsthroughthepandemic,several


specificquestionswereputtorespondentsthroughthesurvey.

AsseeninFigure2.9,onlyone-quarter(26.4%)ofrespondentsratedCOVID-19asamajorbarriertoadoption,puttingitinjoint12thplacewithaccesstoskilledstaffandtheuncertainUKeconomicoutlook.Hence,thepandemicwouldseemnottobeasourceofconcernforthemajorityofUKRegTechs,atleastwhenitcomestoadoption.But,asFigure2.10(nextpage)clearlyshows,alargemajorityofthosesurveyedstillagreethatRegTechshaveacrucialroletoplayinhelpingfinancialfirmstonavigatethechallengespresentedbyCOVID-19.Thisviewwasreplicatedacrossthekeyfocuscategoriesofthereport– FC and RCM –90.6%and85.1%ofwhomrespectivelyagreedwiththatstatementpresentedinthe

question.Also,notably,alloftheRRvendorswhoansweredthequestionagreed.

Diggingintotheresultsbycategory, RCMvendorswerecoolerstillonthis notion,with68.2%signallingagreementandalmostone-fifth(18.1%)standingopposed. Incontrastthough,themorebullishvoices ofFCandRRvendorsspokeupmore strongly,with81.3%and77.0%respectively inagreement.Hence,itseemsmore‘successful’vendorcategories(i.e.those mostlikelytoforecastincreasedsalesin 2020and2021)aremorelikelytoalso regardthepandemicasaninflexionpoint fortheirsector.

0 Percentage 2.5% 5% 7.5% 10% 12.5%

Long procurement cycles in buying organisations

Lack of buyer education/awareness around available solutions

Difficulties of navigating internal descision making processes within financial institutions

Constraints imposed by legacy technology in financial institutions

Lack of available budget within financial institutions

Difficulty in integrating RegTech solutions into financial institutions’ existing technology stacks

Lack of boardroom support for investment in RegTech

Fear of a RegTech project not meeting its objectives

Lack of available staff with the right skills

Reluctance of the regulator to promote RegTech solutions

Lack of data standards and interoperability

Lack of a digitally-enabled regulatory framework

Impact of COVID-19 pandemic on client appetite

Uncertain UK economic outlook

Lack of adoption of cloud-based solutions

Competition from other solutions

Rapid speed of domestic/global regulatory change

High cost of available solutions

Lack of available solutions that meet the needs of buyers

Figure 2.9 Largest perceived barriers to RegTech adoption – comparison between individual responses from the total sample with those from FC and RCM category respondents

Question: “Which of the following factors do you regard as the largest barriers to greater RegTech adoption in the UK?”

Sample Sizes: AllResponses,n=688|FinancialCrime,n=203|RegulatoryandComplianceManagement,n=150



2.4.3 The pandemic as a ‘watershed moment’ for UK RegTech

Elsewhere,vendorswereaskedwhetherthepandemicrepresenteda‘watershedmoment’fortheirindustry.Whilemostwentalongwiththeidea,theiragreementwasnoticeablylessresoundingthistime.Indeed,whilemorethantwo-thirdsofrespondents(70.3%)‘strongly’or‘somewhat’agreedwiththestatement,one-in-five(19.0%)neitheragreednordisagreed,and8.3%dissented.

0 Percentage 20 40 60 80 100


Financial crime (n=32)


60.3% 24.8% 8.3% 4.1%

75% 15.6% 6.3% 3.1%

53.6% 22.7% 9.1% 4.5%

53.8% 46.2%


Figure 2.10 Do RegTechs have an important role to play in helping organisations navigate the challenges presented by the COVID-19 pandemic? Question: “To what extent do you agree with the following statements about RegTech: “RegTech solutions have an important role to play in helping regulated firms, and the bodies that supervise them, navigate the challenges presented by the COVID-19 pandemic”Sample Sizes: AllResponses,n=121|FinancialCrime,n=32|RegulatoryandComplianceManagement,n=22|Regulatory

Reporting,n=13


Figure 2.11 Does the pandemic represent a ‘watershed’ moment for RegTechs?

Question: “To what extent do you agree with the following statements about RegTech: “The regulatory, technologicaland behavioural shifts arising from the COVID-19 pandemic represent a ‘watershed moment’ for the RegTech ecosystem”


0 Percentage 20 40 60 80 100




36.4% 33.9% 19% 5% 3.3% 2.5%

43.8% 37.5% 15.6% 3.1%

45.5% 22.7% 13.6% 13.6% 4.5%

30.8% 46.2% 23.1%



2.4.4 Vendor views on the direct impact of COVID-19 on their businesses

Sofarsogooditseems.However,theviewtowardsCOVID-19takesamoresoberturnwhenrespondentsareaskedspecifically to measureitsimpactontheirbusinesses.Asmentioned,thepandemichaswroughtglobalhavoc,andforvendorsandotherenterprises itcausedthedislocationofteamsandpresentedadditionalchallengestothosedevelopingnewproductsandsolutions. Figure2.12showstheresultsofaquestionfocusingontheimpactofCOVID-19onbusinessgrowth,andfromthisstandpointthepictureisperhapsbestdescribedas‘mixed’.

AsFigure2.12shows,foralmosthalfofvendorssurveyed(42.6%)COVID-19hasbeenapositive.Inparticular,thiswasthecaseforalmosttwo-thirds(69.2%)oftheRRrespondentswhoansweredthisquestion,whoreported‘strong’or‘moderate’businessgrowthdirectly as a result

ofthepandemic.ThisresultwasfaraheadofvendorsinthecategoriesofFC(43.9%)andRCM(31.8%).Meanwhile,asteadyone-quarterofrespondentsacrosscategoriesreportedfeelingnochangeatalltotheirbusinessasaresultofthepandemic(rangingfrom22.7%inRCM,totheoverallaverageof25.4%).However,forafurtherone-quarterofvendors(27.1%)thepandemichasspecificallycreatedadragonbusinessgrowth.ThisfigurerisesforFC(28.1%)andRCMvendors(36.3%).Incontrast,only7.7%ofRRvendorsreportedanegativeimpactongrowth,illustratingtherelativeexposureofeachgrouptotheravagesofthepandemic.

2.4.5 Vendor views on the impact of COVID-19 on RegTech demand in general

ThismoremutedviewofCOVID’seffectcanalsobeseenwhenvendorswereaskedtothinkaboutthespecificimpactofthepandemicondemandforUKRegTech.AsFigure2.13shows,

0 Percentage 20 40 60 80 100




9.8% 32.8% 25.4% 23.8% 3.3% 4.9%

15.6% 43.8% 21.9% 28.1% 6.3%

9.1% 22.7% 22.7% 22.7% 13.6% 9.1%

7.7% 61.5% 23.1% 7.7%


Figure 2.12 How has the onset of the COVID-19 pandemic impacted your UK business?Question: “How has the onset of the COVID-19 pandemic impacted your UK business?”


0 Percentage 20 40 60 80 100




41.0% 35.3% 13.9% 9.8%

37.5% 34.4% 21.9% 6.3%

40.9% 22.7% 18.2% 18.2%

53.9% 38.5% 7.7%


Figure 2.13 How has COVID-19 impacted UK demand for RegTech in general?Question: “How do you think the COVID-19 pandemic has impacted UK demand for RegTech solutions in general?”



neitherthestronggrowthreportedbyvendorslastyear,theslimregardpaidtothepandemicasabarriertoadoption,northeimportantroleRegTechsfeeltheyhaveinhelpinginstitutionstoadapttothevirustranslatedreadilyintoaviewofCOVIDasademanddriver.Indeed,onlytwo-fifthsofvendors(41.0%)regardCOVID-19ashavingboosteddemandforUKRegTech.Mirroringtheresultsofthepreviousquestion, asignificantminorityofvendors(35.3%)insteadregarditsimpacttohavebeenneutral,whiletheremainingone-quarter(23.7%)eitherbelieveithasdecreaseddemand,orwereeitherunableorunwillingtoquantify.

Interestingly,FCvendors–whoarguablyhavebenefitedmorefromtheimpactofCOVID-19thanothercategories–weretheleastlikelytoregardCOVIDasaUKdemandbooster.Only37.5%ofFCrespondentstookthatview,fewerthaninRR(53.9%)and,remarkably,fewerthanRCMtoo(40.9%).Similarly,FCsolutionprovidersweremorelikelytoviewCOVIDasadragondemand(21.9%,vs.anaverageof

13.9%)thanRCMvendors(18.2%)andthoseintheRRspace(only7.7%).

Thisinterestingsetofcontrastingresultsseems,atfirstglance,toreflectsomeformofcognitivedissonance.Itiscurious,forexample,thatamajorityoffirmsreporthighgrowthduringthepandemicperiod,butonlyaminorityconsiderCOVID-19tobeademanddriver.

Inreality,thisblendoffindingsperhapsdoesmoretoreflectthedelicacyvendorsfeelattrumpetingthebenefitsofaglobalscourgelikeCOVID-19,thanitdoesanyconflictwithinthesector.And,despitesomeunexpectedresults,theunderlyingtrendisclear.Duringthepandemic,manyRegTechshaveflourished,steppinguptohelptheirclientsmanagethechallengesthevirushaswroughtonUKinstitutions.COVIDisalso,forthemajorityoffirms,awatershedmoment,butonethatmaywellbeshort-livedasthefinancialservicesindustryadaptstothenewenvironment.

Rank Factor No of votes

% of votes (n=592)

% of sample (n=121)

1Supervisorsencouragingregulatedfirmstoincreasetheir adoptionofRegTechaspartofthesupervisoryprocess

83 14.0% 68.6%

2 BettereducationaroundRegTechforboardsofregulatedinstitutions 75 12.7% 62.0%

3Increasednumbersoffinesandenforcementactionsfrom regulators/supervisors

66 11.2% 54.6%

4 Greateradoptionofcloudtechnology 57 9.6% 47.1%

5 IncreasingcomplexityofUKregulatorylandscapeinfinancialservices 57 9.6% 47.1%

6 Increasingpressureonfinancialservicesinstitutionstocutcosts 48 8.1% 39.7%

7Amendmentstoprudentialregulationtoencouragegreaterinvestmentinsoftwareassets

48 8.1% 39.7%

8Creationofmoresafe-spacestoexperiment,iterate,testandscalenewRegTechsolutions

48 8.1% 39.7%

9 Increaseavailabilityofcapitaltofundgrowth 40 6.8% 33.1%

10 Increaseavailabilityofgovernmentsupporttofundinnovation 38 6.4% 31.4%

11ImpactoftheCOVID-19pandemiconregulatorsandthefirms theyregulate

32 5.4% 26.5%

Table 2.2 Factors with the greatest potential to drive future UK RegTech growthQuestion: “Which of the following factors do you believe have the greatest potential to drive future growth in the UK RegTech sector?”



2.5 RegTech demand drivers

2.5.1 Factors with the greatest potential to drive future UK RegTech growth

Regardlessoftheirsensitivities,foranumberofvendorstherecentmonthshaveseentheirbusinesses,anddemandfortheirsolutions,grow.However,vendorsarealsorealisticaboutthelongtermoutlookforthis‘COVIDwave’.Indeed,asTable2.2showsclearly,COVID-19rankslastonalonglistoffactorsthatvendorsbelievecouldhelppropeltheirfuturegrowth.

Whileonlyone-quarterofrespondentsregardedthefutureimpactofCOVID-19onregulatorsandregulatedfirmstobeadriveroffuturegrowth,almosttwo-thirdsputtheirfaithinregulatorstodomoretosupportthesector(68.6%)andbetterboard-leveleducationaroundRegTech(62.0%).

Inthenextsection,buildingonthesedetailedresults,thereportdistilsthesefindingsintoanumberofchallengestothefuturegrowthoftheUKRegTechsector,andrecommendationsforUKGovernmentandpolicymakers.ToensureUKRegTechscancontinuetopursuetheirsharedgoal– to help regulated firms satisfy their regulatory obligations –policymakersandothercrucialstakeholdersinthewiderRegTechecosystem must act.


The research reveals the existence of multiple challenges for UK RegTechs in multiple dimensions. However, this cocktail of different issues can be distilled down to ten independent yet overlapping, barriers to UK RegTech adoption, all of which demand urgent attention.

Ten key challenges for UK RegTech

Chapter 3


As Exhibit 3.1 illustrates, the research also points to this being a holistic web of self-reinforcing barriers whose interplay strengthens each one depending on the context. Alone, each represents a challenge for UK RegTechs to overcome. However, in concert they interact and present a much more formidable obstacle holding back the deeper adoption of RegTech tools.

This section of the report focuses on refining and defining these challenges in greater detail and exploring the remedies required to achieve a sustainable future for UK RegTech.

Exhibit 3.1 A wall of issues holding back UK RegTech Adoption

Source: RegTech Associates analysis of combined project fieldwork

AWARENESS

BOARD EDUCATION

TALENT

SCALE

FINANCE

VISION

STANDARDSTECHNOLOGY

REGULATOR STANCE

REPRESENTATION

Ten Key Challenges

Facing UK RegTech

It is still unclear what RegTech is and how it helps firms. Financial services institutions (FSI)

also feel vendors must do more to be aware and respond to their needs

There is a lack of an overall vision or strategy for the RegTech sector which filters down into

tactical deployments at the individual firm level.

Desire to maintain ‘tech neutrality’ reduces visible regulator support for RegTech. Still not

part of day-to-day supervisory discussions.

Lack of a unified voice for UK RegTech prevents effective collaboration and lobbying

on behalf of the sector.

Legacy IT harder to connect into, magnifying challenges of integration and interoperability. Weakens case for digitally enabled regulation.

Myriad rules and data types create a complex solution landscape for buyers to navigate. Lack

of standardisation holds back adoption.

RegTech adoption is stymied by a lack of board awareness. Limits engagement, saps confidence

to invest and drives ‘apathy’.

UK scale ups in the RegTech space share the challenge of accessing finance to grow. Lack of

support for FSIs to invest in ‘risky’ projects.

Lack of access to IT workers with required skills (Tech + FS + Compliance). RegTech image

needs a ‘revamp’ to help attract talent.

FSIs discouraged by ‘riskier’ small vendors, natural preference for ‘BigTech’. Naivety sees inexperienced firms propose unsuitable tools.


3.1 Addressing the challenges faced by UK RegTechTherefinedlistofcomponent‘bricks’derivedfromtheresearchmustbefullyunderstoodtobeaddressedandovercome.

3.1.1 Awareness

Thefirstoftheseis AWARENESS.TheresearchshowsthatRegTechisasectorwithanawarenessproblem.ThisextendstofundamentalslikethedefinitionofRegTechitself,aswellashowitsupportsfirmstoachievebettercompliance,andwhythatisanattractivegoalforregulatedfirmstotarget.RegTechisnotFinTech,butitistechnologythatcanandshouldbeusedbyfinancialservicesfirmstoenhancetheircompliancestandards.AndyetthelackofawarenessaroundRegTechhasgeneratedasignificantdragonadoption.Intheabsenceofacentraldirectoryofvendors,andanyformofaccreditation,itistougherforfirmstofindthebestvendorstoworkwith.

Inmostcircumstances’buyersrelyonpeerrecommendationsandconferenceattendancesastheirprimarymeansofscoutingoutnewsolutionpartners.Thisactivityisthereforeprofoundlyinefficientandunsystematic.However,awarenesscutsbothways,andinstitutionswanttoseegreatercommercialawarenessfromvendorstoo.Intervieweesreportedtoolittleunderstandingandconsiderationfortheircomplexindividualrequirements.Andso,raisingawarenessofbuyers’needsandshowinggreaterwillingnesstounderstandandrespondtothemwillalsohelptostimulatefutureadoption.Likewise,itwillalsoservetoeliminatetheneedforexpensiveinternaldevelopmentworkbybuyers,manyofwhomfeelobligatedtobuildthelastmileofRegTechprojectsthemselves.

3.1.2 Regulator stance

Inthesurvey,68.6%ofvendorscalledonsupervisorstoencourageregulatedfirmstoincreasetheiradoptionofRegTechaspartofthesupervisoryprocess.TheREGULATOR STANCErankedfirstonalistof11potentialremediesputtorespondentsfortheirconsideration.Fortheirpart,UKregulatorsfeeltheyhaveatightropetowalk.Whilenotanti-tech,theyaresomewhathesitanttobeseentochampionanyspecifictypeoftechnologysuchascloud.Indeed,aslongascompliancestandardsarebeingmaintained,themethodsregulatedfirmsusetocomplyare

ofnoimmediateconcerntothem.However,regulatorsdoacknowledgethatgivingclearersignalstothemarketaroundtechnology–e.g. what ‘good’ RegTech looks like, how they approach compliance innovation–wouldhelpfirmstobemoreconfidentabouttheirowntechnologyinvestments.Inaddition,aswiththesettingofstandards,itwouldalsogosomewaytowardsaddressingthe“if it ain’t broke, why fix it?”conundrumfacingresource-strappedcomplianceteams.Elsewhere,themajorityofregulatedfirmsinterviewedforthisstudyreportedthattechnologyissueswereeitherasmallorabsentpartoftheirdialoguewithregulators.Inlargepartthen,addressingthisbarrierwillrequireregulatorstomakeRegTechamuchmorevisibleandfrequenttopicofdiscussionduringtheirinteractionswithregulatedfirms,cementingitsplaceontheregulatoryagenda.

3.1.3 Scalability

SCALABILITYpresentsarangeofchallengesforUKRegTechs.Smallervendorswithfewerthan50full-timeemployees,whomadeup43.8%ofthesurveysample,canloseoutoncontractstobiggerfirms,eventhoughinstitutionsadmittheyaresometimes‘lessinnovative’thantheirmorediminutivepeers.Tosatisfylong-establishedprocurementprocesses,thereispressuretodemonstratealongtrackrecordofdelivery,toguaranteelongevity,andtogivecomforttobuyersthatfutureproblemswillbeswiftlyremediated.Forsmallerfirmsunabletoprovidesuchproofs,theroutetheynavigatefromproposaltoimplementationwillbefarmoreperilous.Vendorsalsoneedenoughscaletobeabletoadaptnichesolutionsforlargerclients(e.g.,providingmulti-languagesupportforaproprietarytradersurveillancesystemtomeettheneedsofamultinationalinvestmentbank).ThisrequiresadeeperawarenessoflargerFSI’smorecomplexneedsaswellasR&Dfundingtodoso.However,ifvendorsareenabledtoselltolarger,morecomplexbuyers,closingtheawarenessgapsthatcanopenasfirmsscalerapidly,thelistofpotentialsuppliersthatlargeinstitutionscantapwillgrow,andsotoowilladoption.


STUDY

Enterprise Ireland – funding for scale

EnterpriseIreland(EI)isapublicagencyresponsibleforthedevelopmentandgrowthofIrishenterprisesinworldmarkets.Theorganisationoffersacomprehensiveandmultifacetedapproachtostimulatinginnovation.EIworkswithentrepreneursandbusinesspeopleacrossthefullbusinessdevelopmentspectrum,fromearly-stageentrepreneurs,toestablishedbusinessownersandIrishmultinationalcompaniestodeliversustainablegrowth.Additionally,EIusesfundingmechanismstobolsterdomesticresearchcapabilitiesandfacilitatecollaborativelinksbetweenenterpriseandtheresearchcommunity.

EIoffersfiscalandnon-pecuniarysupportforentrepreneursandstart-ups.Theorganisation’soverarchingHighPotentialStart-upUnit(HSPU)dedicatesalargeportionofcapitaltoDeepTechthroughTheCompetitiveStartFund(CSF).WhiletheCSFfocusesonallsectors,itstrongly63encouragesapplicationsfromearly-stagecompaniesactiveinFinTech aswellasstart-upsprovidingtechnologydrivensolutionswithinthefinancialservicessector.

Inaddition,EI’sNewFrontiersEntrepreneurDevelopmentProgrammeprovidesfurthersupportforthesecompaniesbycombiningarangeofbenefitsincludingmentoring,incubationspaceanda1-5,000-euroscholarshippaymenttoequipfounderswiththeskillsandcontactsneededtomakebestuseoftheirfinancialcapitalandsuccessfullystartandgrowacompany.

Since2016,EIhasinvestedover€110minover660start-upswithcirca60%beinginthetechnologyorsoftwarefieldandover10%inFinTech(whichincludesRegTechsolutions).EIhavealsorecentlyinjected€10millionintoIrishventurecapitalfirmMiddleGameVenturestocreateapooloffundingof€20millionwhichistobedirectedsolelytowardinvestingintheIrishFinTechandRegTechindustry.

63 Seehttps://www.enterprise-ireland.com/en/funding-supports/ (AccessedJanuary2021)https://www.irishexaminer.com/business/arid-31006315.html(AccessedJanuary2021)

3.1.4 Vision

Innovationcanbeafraughtprocess,andVISION isrequiredtomakebravechoices.ToachievethefulltransformativepowerofRegTech,allactorsintheecosystemneedtohaveaclearplanforembracingRegTech’spotential.Currently,asoutlinedinseveralinterviews,fewfinancialinstitutionscurrentlyfeelincentivisedtotakeavisionaryapproachtocompliance.Beyondthefundingelementofinnovationisthefearoffailure,whichinpartisperpetuatedbyalackofcleardirectionfromUKregulatorsaroundhowtheythinkabouttechnologyrisk.Complianceteamsneedtheconfidencetotaketransformativeleaps.Thismeansconfidenceinthewaytheregulatorwilltreatanyfuturecompliance-relatedchallengesthatarisethroughinnovation.Italsomeansbuildingconfidenceintheabilitiesofsmallervendorstoprovidevaluablecompliancesolutions,levellingaplayingfieldthatcurrentlyfavoursbig,establishedsuppliers.And,ofcourse,italsomeansfindingtheconfidencetochallengetheviewthatwhat“ain’t broke” maystillrequireupdatingandenhancement.Byaddressingthesechallenges,regulatedfirmswillbefreertoact,toselectthevendorsthatbestmeettheirneeds,andimprovetheirchancesofsuccessfullytappingrequiredresources.

3.1.5 Representation

Finally,UKRegTechsalsolackthemeanstospeaktothechallengesitfaceswithasingle,consistentvoice.BetterREPRESENTATION isneeded.Inotherjurisdictions,RegTechsbenefitfromtheirmembershipsofwellorganisedassociationsthatrepresenttheirinterestsinthemarket.Indeed,strongindustryrepresentationcanhelptoaddressmanyofthechallengesoutlinedabove,byraisingawareness,drivingbestpractices,lobbyingregulatorsandpolicymakersforgreatersupportandorchestratingtheenhancedcooperationneededbetweenstakeholdersacrosstheecosystemtoboostadoption.Intheabsenceofsuchanorganisation,thechallengesoutlinedherewillcontinuetopersist.

https://www.enterprise-ireland.com/en/funding-supports/

https://www.irishexaminer.com/business/arid-31006315.html


3.1.6 Technology

TECHNOLOGY challengesaboundincompliance,withtwoofthetop6barrierstoadoptionidentifiedbyvendorslinkedtoinfrastructure.FourthontheirlistweretheconstraintsimposedbylegacyIT65,whichisawell-knownandwellunderstoodchallengeformanylong-standinginstitutions.ItisalsomaterialtoRegTechadoptionsincelegacysystemscanmakeimplementationsmoredifficultandcostlytocomplete.Italsocreatesadragonachievableefficiencygains,sapsavailableresources,andcannegativelyimpactthebusinesscaseforfutureprojects.ThesefactorswerealsohighlightedintheFCA’srecentreviewon‘ImplementingTechnologyChangeReview’,whereitwasnotedthatfirmswithahighproportionoflegacytechnology‘limitstheflexibilityofprocessesandpreventsfirmsfromtakingadvantageofnewdevelopments’.66

Closelyalignedtothisisthechallengeofintegration,whichrankedsixthonvendorslistofbarriers,reflectingthedifficultiesofhookingnewsystemsintocomplexclientinfrastructure.Interoperabilityisanissuethatcroppedupfrequentlyininterviews,particularlygiventheimportancetofirmsofacquiringsolutionsthatcanworkwelltogetheronasingleplatform(whichoneinstitutiondescribedas“coopetition”).ThepopularityofprogramminglanguagessuchasPython,withitsextensivelibraries,canhelpinthisregard,ascantheavailabilityofstandardiseddataandcompliance-savvytechtalenttoadviseonandsupportRegTechprojects.

3.1.7 Board education

AdearthofBOARD EDUCATION isanotherkeybarrier,alliedtoandoverlappingwiththelackofawarenessaroundRegTech.Inthesurvey,62.0%ofvendorscalledforbettereducationaroundRegTechfortheboardsofregulated

65 LegacytechnologyisabigdriverofcostforFSIs.Notonlydotheydrivematerialmaintenancecosts,butthereisalsothecostoffinesleviedbyregulatorswhenlegacysystemsfailaswellastheopportunitycostofstymiedinnovation.Inmanycases,FSIsrunmultiplelegacysystemsside-by-side,requiringmoreITstafftomanage.Meanwhileagedsystemsrequireeverscarcerknowledgeofoutdatedcomputerlanguagestomaintain.FSIsareheavilyinvestedincuringtheir‘legacyhangover’,butsuchsystemsarenoteasilyremediated,withminortweaksoftendrivinghighcosts.Legacycoresystemsalsotypicallyrun-onmainframes,withgroupstaskedwithsupportingindividualapplications.Thisismeaningfulsinceitmakeschangeandscalabilityexpensivetoachieve,slowingdownnewintegrationsanddraggingonperformance.

66 https://www.fca.org.uk/publications/multi-firm-reviews/implementing-technology-change#lf-chapter-id-the-impact-of-infrastructure-impact-of-legacy-technology(AccessedFebruary2021)

STUDY

RegTech Association in Australia – what can be achieved for the industry 64

TheAustralianRegTechAssociationwasfoundedin2017byahandfulofAustralianRegTechstart-upswiththeaimtobuildanecosystemofhighperforming,ethicalandcompliantbusinessesthroughRegTechinnovationandinvestment.Theassociationbringstogethergovernment,regulators,regulatedentities,professionalservicesandfounderledRegTechcompaniestofostercollaborationbetweentheparties.TheassociationalsoworkstopromotetheRegTechindustryaswidelyaspossible,resultinginanincreaseduptakeofRegTechproofofconceptsanddeployedRegTechsolutionsacrossAustralia.TheAustralianRegTechAssociationhasexperiencedsteadygrowthsinceitsinception,nowwithover130organisationalmembers(over85RegTechsandtherestmadeupfromglobalcorporationsandmajorbanks).

FundingTheRegTechAssociationreliesonsponsorshiptohosteventsandperformresearch.Sponsorshipcomesfromboththepublicandprivatesector,frompartieswhoseevalueintheuseofRegTechandwishtocontributetoitsglobalexpansion.Asanexample,theNewSouthWalesgovernmentinjected$30KcapitaltosupporttheirACCELERATERegTecheventin2019.TheRegTechAssociationalsoinvitesprivatevendorstosponsoreventsinreturnforopportunitiestogiveproductdemosandbeapartofpaneldiscussions,aswellasbeingpromotedbytheRegTechassociationonsocialmediaandotherchannels.

InitiativesTheAustralianRegTechassociationhostsanumberofeventsthroughouttheyeartoincreaseRegTechexposure.TheACCELERATERegTecheventsareaseriesofcompetitionswherebywinnerscanreceiverecognitionforthestrengthoftheirsolutionanditsmarketappetite,aswellastheirbusinessmodelandthepotentialscalabilityofthesolution.Throughtheseevents,TheAustralianRegTechAssociationareabletopromote‘good’RegTechandgivevendorsanunmatchedopportunitytogainindustryexposure.AudienceattendeesinthepasthaveincludedthelikesofAUSTRADE,AmericanExpress,PwCandtheBankofQueensland.Thedemandfortheseprogramshasgrownbyover7timessince2019.

Additionally,theAustralianRegTechAssociationmeetsmonthlywithUKandAustralianregulatorsandglobalpartnerstoaidcollaborationandsharebestpracticeandeducationofRegTech.Since2017theassociationhasruneventsinSingaporeandLondontostimulatecross-borderopportunitiesforRegTechcompaniesandin2020alonetheyaccommodated5000peoplefrom40+countriesatonlineeducationprogramsandRegTechshowcases.

64 Seehttps://www.regtech.org.au/ (AccessedJanuary2021)https://www.dfat.gov.au/sites/default/files/aukfta-submission-the-regtech-association.pdf(AccessedJanuary2021)

https://www.fca.org.uk/publications/multi-firm-reviews/implementing-technology-change#lf-chapter-id-the-impact-of-infrastructure-impact-of-legacy-technology



https://www.regtech.org.au/

https://www.dfat.gov.au/sites/default/files/aukfta-submission-the-regtech-association.pdf

https://www.dfat.gov.au/sites/default/files/aukfta-submission-the-regtech-association.pdf


institutions,rankingitsecondonalistof11factors.Intervieweesdescribedhowinfluencingbudgetholdersinternally,particularlyatboardlevel,canbeafrustratingexperienceforcomplianceteams.Incaseswherethereisnoimmediategaptoplugintheircompliancetechnologystack,theycanfindtheirprojectsstymiedbycriesof“...if it ain’t broke, why fix it”. Sotoo,whereboardsmustchoosebetweeninternal-facingcomplianceoptimisationandexternal,customer-facingprojectsthatpromisenewrevenue.Bettereducatedboardswillmakebetterinformeddecisionsaboutwheretoinvestscarcecapital.UpskillingatthetopofFSIswillalsohelptooffsettheapathytowardscompliancetransformationholdingbackgreaterRegTechadoption.

3.1.8 Standardisation

Theglobalregulatorylandscapeisvastandcomplex,featuringawidearrayofrulesforfirmstotrack,andanenormousrangeofdatatypestobefound,vetted,aggregatedanddelivered.AlackofSTANDARDISATIONinbothrulesanddatahascreatedlayeruponlayerofunnecessarycomplexityforfirmstodigest.ThiscanmakefindingtherightRegTechsolutionmoredifficultandaddtothescalegapbyplacingadditionalrequirementsonvendorstosatisfymultipleruleswhoseintentisbroadlyidentical.Progresstowardsstandardisationhasbeenslowandpiecemeal,howevermorecanbedoneataUKleveltoharmoniserulebooksandclearthewayforfirmstoachievegreaterefficienciesfromtheRegTechtoolstheyinvestin.

3.1.9 Talent

BoardsarenottheonlycohortinneedofbettereducationaroundRegTech.ThescarcityofcriticaldeveloperTALENTinfinancialservices–bothforinstitutionsandvendors–iswelldocumented67,asarethepotentialprizesinbroadtechnologyareaslikeAIanddataanalytics.However,astheinterviewsdemonstrated,technologyskillsalonearenotenoughtomeettheneeds

67 ArecentstudybytheFinancialServicesSkillsTaskforce(FSST),whichfoundthatthelimitedavailabilityofskilledworkersinFinTechwasharmingbothcompetitivenessandinnovation.AsstatedintheirreportfromJanuary2020,“Overhalf(53%)ofUKFinTechsciteattractingsuitabletalentasaconcern,thetoprankedchallengefacingthesector.Softwareengineering,systemarchitectureanddevelopmentwascitedasthemostin-demandskillset(rankedfirstby52%offirms),butalsothehardesttofind.Thesecondmostvaluable,andequallydifficulttosource,wasdataanalyticsanddatascienceskills(rankedtopby19%offirms)”https://wp.financialservicesskills.org/wp-content/uploads/2020/08/FSST-FINAL-report-1.pdf

ofinstitutions.Rather,withthestakessohigh,candidatesmustacquirearobustunderstandingofrelevanttechnologies(e.g.databases,statisticaltechniques),FSindustrysectors(e.g.banking,insurance)andtheiroperatingcontext(e.g.compliance)inorderto deliver realvalueonprojects(seeboxoutbelow).Similarly,thedepthandstandardoftechnologyeducationforsupervisorsthemselvesisalsoanareaofpotentialfocus,giventheimportanceplacedonthediscussionsthatshouldhappenbetween‘regulator’and‘regulated’regardingtheircompliancetechnologyinfrastructure.

Whilethereismuchworktobedonetogrowthecompliance-awaretechtalentneededtosupportthenextgenerationofRegTechprojects,urgentattentionshouldalsobegiventothe‘imageproblem’facingRegTech(i.e.doesn’tgeneraterevenue,notcustomerfacing,lessexcitingthanotherprojects).Misconceptionsaboutthescope,scaleandimportanceofcompliancetechnologywerecalledoutasapotentdisincentivebyinstitutionalinterviewees.Itmadeitharderforthemtoattracttherightinternaltalentintotheirbusinessunits,particularlywhencompetingwithotherfront-officefunctions,andalsoimpactedrecruitment.Inoneinstance,acomplianceintervieweeexplainedhowmanagement’sdecisiontosponsoracaptivetechnologyteam(includingdevelopers)forcompliancehad‘changedthegame’forthem.Ratherthanfightingforinternalresources,theynowenjoyedbetterinformedandmorecordialrelationshipswithotherinternalteams,betterdiscussionsaroundhowbesttodeploytheirresourcestosupport‘bestcompliance’,andgreatersuccessinimplementingnewsolutions.Whilefirmscannotbemandatedtoreplicatesuchaforward-thinkingmodel,leadingpracticeslikethiscanbebetterrecognisedandincentivisedtoencouragemoreFSIstofollowsuit.

https://wp.financialservicesskills.org/wp-content/uploads/2020/08/FSST-FINAL-report-1.pdf

https://wp.financialservicesskills.org/wp-content/uploads/2020/08/FSST-FINAL-report-1.pdf


STUDY

The financial services talent gap

Financialservicesisanindustryintransformation,withbigprizesavailabletothosewhocanmakethemostoftheopportunitiespresentedbytechnology.Onerecentanalysisforecast$1trillion68ofpotentialcostsavingsforglobalfinancialservicesthroughthebetteruseofAIby2023.Aroundhalfofthisenormousfigure($447billion)wouldberealisedinthebankingsectoralone.And,withitslongtailofmanualprocessesripeforautomation,itwouldbefairtoassumethatasizablechunkofthisenormousfigurewouldlandincompliance.However,toexploitthisopportunity,firmsneedtalenteddeveloperswiththerightskills.

Whatqualifiesastherighttalentthoughmaynotimmediatelybeobvious.Forexample,mostwouldagreethatAIhiresshouldideallypossesscomputationalskill,businessknowledge,andamasteryofstatisticalandmathematicalframeworks.Currently,theproportionofAI-alignedtalentthatcanworkeffectivelyacrossthosedisciplinesislimited,withmanycollegeanduniversitycoursestendingtotrainstudentsinonlyoneofthethreecriticalareas.Inaddition,candidatesneedtounderstandhowfinancialserviceswork.Whileskillslikethoseneededforappdevelopmentaretransferableacrossindustries,AIonlyworkswhenappliedtotherightusecases.Programmingandstatisticalskillsarenecessarytobuildandtestalgorithmsandinterpretoutputs,butdomainknowledgeisessentialtoensuretheyworkintherightway.

Andso,withoutagraspofFSbusinessmodels,operatingchallengesandmarketconditions,firmscouldwasteresourcesandevenaccidentallycreatenewrisks.ThisisalsotrueforthespecificsofthecompliancecontextinwhichRegTech-savvydevelopersareneeded.Understandingtheintentofanewdeploymentandbeingcognisantoftherulesandstakesgoverningthisworkareequallyessentialcontext.

AIisamajorfeatureofmanycurrentRegTechprojects,butitisonlyoneofmanytechnologyareasthatfirmsneedtoacquireexpertisein.Anopportunityexiststoreviewtheprovisionoftechnologytrainingforfinancialservicesingeneral,andcompliancetechnologyinparticular.Inthiswaythespecificend-to-endskillsneededtonavigatefutureprojectscanbeincorporatedinacademiccourses,apprenticeships,professionalqualificationsandworkplacements.

68 SeerecentblogbyCristinaLázaro,headofCaixaBankBusinessIntelligence,forFinTechFuturesondata-drivendecisioning,Feb2020:https://www.fintechfutures.com/2020/02/from-data-to-decisions-the-rise-of-ai-in-retail-banking/

Financial Services Skills Commission

TheFinancialServicesSkillsCommissionisanindependent,member-ledbodyworkingwiththeUKsectortoensurethatithasthetalentandskillsitneedsforthefuture.SomeofthekeyactivitiesfortheCommissionoverthenexttwoyearsinclude:

• Producingandmaintainingarobustanalysisoftheskillsneedsofthesectorandworkingwithfirmsandregulatorstodriveinvestmentinskillsandupskilling;

• Creatingandmaintainingacommonskillsframeworkandworkingwithfirmstodriveadoptionandeducation&trainingproviderstoembedtheframeworkinskillsprovision;

• Creatingcommonmessagesandcollaborativeactionattraction,targetingspecificaudiencestowidenanddiversifyentryroutes.

The Skills Frameworkwillidentifyanddefinefutureskillsrequiredbythesector.Bycreatingcommondefinitionsandproficiencylevelsforskillswithalignmenttojobfamilies,theframeworkwillsupportinvestmentintraining,skillsbasedrecruitmentanddevelopmentofcareerpathwaysforfirmsandindividuals.

https://www.fintechfutures.com/2020/02/from-data-to-decisions-the-rise-of-ai-in-retail-banking/

https://www.fintechfutures.com/2020/02/from-data-to-decisions-the-rise-of-ai-in-retail-banking/


3.1.10 Finance

Meanwhile,scaleFINANCE hasbeenachallengeintheUKforsomeyears,andadiscussionisalreadyunderwaytoaddresstheestimated£15billiongapingrowthcapitalprovisionfacingthenation’ssmall,innovativebusinesses69.This,ofcourse,impactsRegTechasitdoesotherareasoftheeconomy.However,thefinancechallengeforUKRegTechisnotsimplyoneoffunding.Although31.4%ofvendors‘voted’foranincreaseintheavailability

69 See“TheFutureofGrowthCapital’’reportbyInnovateFinance, TheScaleUpInstitute&Deloitte.Itincludescallsforthecreation ofafutureopportunityfundtofocusinvestment,theopeningupofaccesstocorporatefunds(inc.anestimated£6billionofso-called‘patientcapital’heldbyUKpensionfunds)andawiderroleforInnovateUKindistributinginnovationcapitaltotheUK’smostinnovative,earlystageandscalingbusinesses.Published:06Aug20https://www.innovatefinance.com/reports/the-future-of-growth-capital/

STUDY

MAS – Reducing risk for financial institutions to adopt RegTech70

70 https://www.fintechfutures.com/2020/08/singapores-mas-pours-182m-into-second-fintech-fund/(AccessedJanuary2021)https://www.mas.gov.sg/schemes-and-initiatives/fsti-scheme(AccessedJanuary2021)

TheMonetaryAuthorityofSingapore(MAS)offersarangeoftargetedfiscalsupportpackagestostimulateRegTechinnovationandadoptionthroughouttheirfinancialservicessector.TheregulatorhasrecentlyannouncedaS$125mCOVIDsupportpackageandS$6millionFinTechSolidarityGrant,whichoffercomprehensivesupportfortechnologystart-upsinSingapore.Additionally,MASstronglyencouragesbuy-sideexperimentationthroughtheirFinancialSectorTechnologyandInnovationScheme(FSTI),intowhichtheyrecentlycommittedanadditionalS$250milliontofurtherongoingeffortstoacceleratetechnologyadoptioninSingapore-basedFIs.

TheFSTIisauniqueschemewhichhighlightstheimportantrolegovernmentandregulatorscanplayinovercomingbuyerinertiaintheRegTechindustry.Sinceitsinceptionin2015,morethan200FIshavereceivedfunding,leadingtodevelopmentofover40innovationlabs,inwhichover60%ofemployeesareSingaporean.SomeofthekeygoalsoftheFSTIschemeinclude:

1.EncouragingfinancialinstitutionstosetupinnovationcentresofexcellenceorlabsinSingaporetotestinnovativeideasandrollourmarketsolutions.MASoffersco-fundingsupportofupto50%forsalariesofexistingornewstaffinvolvedintheproject.

2.Improvingindustry-widetechnologicalinfrastructureorutilitytoboostefficiencyandproductivityinthefinancialsector.MASprovidesupto70%ofleveloffundingforqualifyingexpensesinprojectswhichbuildtechnologicalinfrastructureorresultinproductivitygains–keyareasoffocusincludecybersecurityanddataanalytics/AI.

3.Encourageexperimentation,developmentanddisseminationofinnovativetechnologiesthroughsponsoringPoCprojects.TheFSTIschemeoffersuptoS$400Ktoconductearlystagedevelopmentofnoveltechnologysolutions.

4.TheDigitalAccelerationGrant(DAG)withintheFSTIsupportssmallerFIsandFinTechfirmstoadoptdigitalsolutionstomanageriskandimproveproductivity.Qualifyingfirmscanreceiveupto80%co-fundingonimplementationorprojectexpenses.

Inthenextsection,therecommendationsandnextstepsneededtosecurethesustainablefutureofUKRegTechareoutlinedforconsideration.

ofGovernmentsupporttofundinnovation,thisstillranked10thinalistof11supportmeasuresvendorswereseeking.Asotherjurisdictionshaveshown,grantstoinstitutionstosupportthehiringoftalentandexperimentationwithnewtechnologycanbejustasefficaciousinstimulatinguptake.Measuresthatreducetheperceivedrisksofcomplianceinnovation–especially in terms of its cost –wouldtherefore beverywelcomeindeed.

https://www.innovatefinance.com/reports/the-future-of-growth-capital/

https://www.innovatefinance.com/reports/the-future-of-growth-capital/

https://www.fintechfutures.com/2020/08/singapores-mas-pours-182m-into-second-fintech-fund/

https://www.mas.gov.sg/schemes-and-initiatives/fsti-scheme

https://www.mas.gov.sg/schemes-and-initiatives/fsti-scheme


Twelve specific recommendations arising from this report focus on addressing the challenges identified in the previous section.

Recommendations and next steps

Chapter 4


Twelvespecificrecommendationsarisingfromthisreportfocusonaddressingthechallengesidentifiedintheprevioussection.

WhilstalltheserecommendationscombinedwillhavethemostpositiveimpactontheUKRegTechindustry,threeinparticularstandoutasbeingthehighestpriority:

Creating a coherent and collective voice for the UK RegTech Industry.

Establishing a new accreditation and testing centre for RegTech solutions.

Regulators to adopt a ‘tech embracing’ stance to advocate for improved standards for technology driving regulatory compliance in firms.

Theserecommendationsarealignedtothekeystakeholdergroupsthatwereresearchedforthisreport–vendors,regulatedfirmsandtheregulatorsthemselves–togetherwithseveralgeneralrecommendationsthatcutacrossallthreesetsofactors.Alsoincludedaresomeindicativenextstepsforimplementingtherecommendationswhichareintendedasastartingpointfordiscussionwiththerelevantstakeholders.

AsExhibit4.1shows,theyarephasedforshort-,medium-andlonger-termimplementation,dependingontheiranticipatedcomplexity.

Exhibit 4.1 A matrix of recommendations to address RegTech Challenges

Source: RegTechAssociatesanalysisofcombinedprojectfieldwork


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4.1 Recommendations matrix


1 Establish a VISION for RegTech through a strategy-led approach

Usethefindingsfromthisreportasakeyinputintothedevelopmentofafully-fledgedUKStrategyforRegTechbytheUKgovernment.ThisstrategywouldlayoutthefuturevisionforallpartsoftheRegTechecosystem,includingvendors,regulatedfirmsandtheregulators.

Evenmorebroadly,theCityofLondonCorporationwouldwelcomeanoverallstrategyfortheUKfinancialservicesindustrywithavisionforsustainingthecompetitivenessoftheindustry.Byboostingitsadoption,RegTechcanbeanimportantleverinthiscompetitivenessagendathroughitspotentialtoreduceoperationalcostsforUKregulatedfirms.

Also,itisimportanttorecognisethattheRegTechecosystemdoesnotsimplyconsistofvendors,buyersandregulators.Indeed,thereisafarwidernetworkofstakeholders–from supply-chain players to Government and academia –allofwhomhaverolestoplayinovercomingthesebarriers.Awell-executedstrategywillsimplifybroaderengagementandmaximisethechancesofsuccess.

SUGGESTED NEXT STEPS

Determine the best ‘home’ for the UK’s RegTech Strategy, acknowledging the application of RegTech to other highly regulated industries.

Gather further evidence regarding the size of the industry and the potential for growth.71

Consult with the RegTech ecosystem to develop a clear vision for building a sustainable future for the industry.

71 SeeSection2formorebackgroundontheavailability ofindustrydata.

2 Build AWARENESS in RegTech’s ability to SCALE through an independent testing and accreditation regime (high priority)

Establishasystemofpractical,independent,technologydrivenRegTechAccreditationtodrivewiderawarenessofUKRegTech,provingtheindustry’sabilitytoprovidescalableandinteroperablesolutions.BycreatinganindependentutilitythatcanactasatestingandprovingplatformforRegTechs,buyerswouldbeprovidedwithgreaterassuranceandconfidencethatthesolutionscandeliver.

Someformofaccreditationagainstanagreedsetoftestingstandards(suchascross-borderdatasecurity,easeofintegrationwithothersystems,processingvolumesetc)wouldfollow,whichcouldincludeandassessmentofthecompletenessandqualityofthedatathatfinancialfirmsgenerallyaskforaspartoftheprocurementoronboardingprocess.


Conduct a feasibility study into the establishment of a UK RegTech testing centre, ideally a collaborative public/private utility model which would be open to RegTech vendors and would test their solutions against an established set of standards to provide assurance of their scalability and interoperability.

Establish a set of standards against which the RegTech Testing Centre would then apply to RegTech solutions – this would need to be done in conjunction with the buying community to ensure there was trust established at the earliest opportunity.

Determine the funding and governance and the role that the UK regulators, if any, would play in the Centre.

4.2 General recommendations


3 Bridge the TALENT deficit by focusing on RegTech skills & education

ReviewtheprovisionofRegTech-relatededucation,skillsandtalent,especiallythosethatpertaintotheenablementofRegTechvendors,regulatedfirmsandregulatorsintheUKtocreate,sell,adoptandoverseenewRegTechtools.Thisshouldincludeprovisionforworkplacements–both within industry and academia–tohelpgrowthenextgenerationofUKcomplianceITspecialistsneededtoimplementchange.


Consider how the Financial Services Skills Commission workstream on the Future Skills framework72 could incorporate and support the development of relevant talent for RegTech, addressing both technology skills, industry sub-sectors (asset management, banking, insurance, FinTech, payments) and regulatory and compliance domain expertise (prudential regulation, financial crime compliance, cybersecurity, privacy regulation, conduct of business, market integrity and transparency).

Review current higher education provision on RegTech and work with academia to ensure essential regulatory and compliance knowledge is made available as part of relevant digital technology courses and vice versa.

Review professional qualification and apprenticeship standards73 relevant to RegTech from professional bodies such as the Chartered Insurance Institute, Confederation of British Industry and the Chartered Institute for Securities and Investment.

72 https://financialservicesskills.org/what-we-do/

73 Forexample,https://www.instituteforapprenticeships.org/apprenticeship-standards/senior-compliance-and-risk-specialist-v1-0

Consider including RegTech skills and talent as part of the research being led by the Financial Services Skills Commission and the Professional and Business Services Council to determine skills needed across the UK regions.

Encourage the cross-fertilisation of RegTech knowledge and skills within the different teams at the FCA and Bank of England, ensuring that front-line supervisors are aware of how RegTech can be applied to firms’ regulatory obligations. Increasing the diversity of skills and talent in different parts of these organisations can reduce group think and improve decision-making.

https://financialservicesskills.org/what-we-do/

https://www.instituteforapprenticeships.org/apprenticeship-standards/senior-compliance-and-risk-specialist-v1-0




4 REGULATORS to adopt a ‘tech embracing’ STANCE to advocate for improved standards for technology driving regulatory compliance in firms (high priority)

UKregulatorsshouldadoptavisiblyandactively“techembracing”stanceacrossthewholeoftheirorganisations,drivingexistingpocketsofadvocacywithinleadershipandinnovationteamsdownintothesupervisorylayers.UKregulatorsmustalsobeempoweredtotakeaclearandpositivepositiononRegTech,whilstrecognisingthattherisksofinnovationmustbebalancedwiththebenefits.RegTechshouldbecomearegulartopicofconversationbetweenregulatedfirmsandsupervisors.


FCA and the Bank of England should empower front line supervisors with sufficient understanding and knowledge of RegTech to include questions about the robustness and effectiveness of compliance technology in their supervisory activities.

Both financial institutions and vendors would benefit from clearer guidance about the principle of ‘technology neutrality’ and what the implications of this are in terms of policy, supervision and the possibilities for engagement with the RegTech industry.

In the longer term, policy-makers and regulators should consider whether ‘technology neutrality’ is a principle that can be upheld, given the accelerated levels of digital transformation in the financial services industry more broadly.

Consider even greater transparency in how the regulators themselves are making use of technology (e.g. from infrastructure choices like cloud, to specific supervisory technologies).

5 Regulators to provide clearer guidance regarding TECHNOLOGY risk management and expectations of what ‘good’ looks like

Aspartofthewideroperationalresilienceagenda,UKregulatorsshouldprovideclearerguidanceabouttheirexpectationsforthestandardsoftechnologyusedtomanagecomplianceobligations.Thiswouldincludedevelopingandsharinganunambiguousviewofwhat‘bestcompliancetechnology’lookslike,andarejectionofcertainlegacycomplianceapproaches(e.g.,spreadsheetandemail-basedcompliance)infavourofleadingpractices.ThisshouldincludeadditionalguidanceforregulatedfirmsonhowtothinkabouttheirITrisk(particularlyinareasthatimpedewiderinvestmentinRegTechsolutions).


The FCA and Bank of England should consider beginning a dialogue with the financial services industry on technology risk management, building on the work that has already been done regarding outsourcing and the use of cloud computing.

Use the input from this dialogue to provide clear guidance on managing technology risk, including how to manage risks from legacy technology and the replacement of that legacy technology with more innovative solutions.

Consider whether improved technology risk management could be specifically recognised through lower operational risk capital requirements.

4.3 Regulatory Recommendations


6 Accelerate work to establish STANDARDS in data and regulatory rules to move towards a digitally-enabled regulatory framework

AcceleratetheworkalreadyunderwaytomaketheUKregulatoryframeworkmoredigitally-enabled.Adigital-firstapproachtoregulationisadvisablefortheUK,giventherapidtransformationoftheglobalfinancialsystemthroughtechnology.Atthecoreofthisapproachisthesettingofcommondatastandardsandtheglobalharmonisationofregulatoryrules.Theseareambitiousobjectives,andwillrequirealongertimehorizontobringthemtofruition.ThisreportisfullysupportiveofthegoalsandobjectivessetoutbytheBankofEnglandintheirDataCollectionTransformationPlanandwouldliketoseethetime-framesshortenedifpossible.Morebroadly,theseactivitiesdemonstratetotheregulatedcommunitythattheregulatorsareleadingbyexampleinadoptingRegTechandwillalsoincentiviselegacylaggardstorenovatetheiroutdatedcoretechnologies.


Include the development of a digitally-enabled regulatory framework as a cornerstone of the UK RegTech Strategy, laying out a clear roadmap for what can be achieved and by when.

Explore opportunities for increasing funding and resource capacity for both the FCA and Bank of England to accelerate this work.

Consult with the financial services industry to create a prioritised list of data types for standardisation.

Consider a new regulatory principle of minimising compliance burdens on firms, including by making rules machine readable.

7 Establish a coherent and collective voice for the UK RegTech industry to improve the REPRESENTATION of the industry in the UK (high priority)

EstablishacoherentandcollectivevoicetorepresenttheUKRegTechindustrytohelpaddressbarrierstoRegTechadoptionbygeneratingmoreawarenessaroundRegTech.Itisenvisagedthatwhateverformthiscollectivevoicetakes,itcouldorchestratesomeoftheactivitiesoutlinedintheserecommendations,particularlyaroundbuildingawarenessandsupportingeducationaroundthesector.Coalescingaroundasharedvisionfortheindustrywouldhelptoclosesomeofthe‘trust’gapsbetweenvendorsandbuyers.RegulatorswouldalsobenefitfromhavingasinglepointofcontactforregulatorswhenseekingviewsfromRegTechs.

WhiletheBankofEnglandandFinancialConductAuthorityhavegonesomewaytofillthisgapinthelandscape,thereareunderstandablelimitsastohowfartheycancontinuetodoso.Aunifiedvoicewillbringfreshimpetusandprovideacollectivevoice fortheindustry.


Consult with the RegTech industry regarding the optimum model for this collective voice – whether it should be part of one of the many existing industry bodies (e.g. Tech UK, Innovate Finance) or a new association in its own right.

Determine the funding model based on the findings of this consultation.

Agree the terms of reference and the role that any collective entity will play in the ecosystem, the type of relationship it will have with UK regulators and how it will encourage close collaboration and strong participation from vendors and institutions.

4.4 Vendor Recommendations


8 Improve AWARENESS and transparency of the benefits of RegTech

ProvidemoreevidenceofandtransparencyaroundthemoregranularbenefitsthatRegTechisdeliveringfromspecificimplementationswithfinancialinstitutionpartners.RegTechvendorscoulddevelopcommonstandardsforevidencingandarticulatingthebenefitsoftheirproducts.Thiswouldbeanaturalroleforthenewrepresentativebody(seeRecommendation7)andshouldincludedrivinggreaterawarenessofbestpracticecasestudieswhereRegTechhasdeliveredmeaningfulvalueandhasbeenscaledeffectively.

OneofthedifficultiesinprovingthebenefitsofRegTecharethedifficultiesinmeasuringandmonitoringthecostofcomplianceanditisrecommendedthatastandardisedapproachisdevelopedtohelpmeasurebothcompliancecostsandthesavingsthatcanbeappliedthroughtheuseofRegTech.


Create a standardised set of industry case studies where RegTech has been successfully deployed at scale and is delivering real, measurable benefits to the financial institutions.

Establish an independent benchmark for compliance costs, including a framework for compiling and assessing a reliable cost of compliance for financial institutions and other business types.

9 Provide better access to FINANCE for UK RegTechs

AcceleratetheworkalreadyunderwaytoaddressalongstandinggapintheprovisionofscalefinanceforsmallbusinessesintheUK.ThiswillhelpensureRegTechfirms,whoareamongstthemostinnovativeenterprisesintheUKeconomy,receiveappropriatefinancialsupporttoscaleandgrow.ThiswouldalsoincludebetterinformationforRegTechsregardingtheavailablesourcesoffinancialsupportalreadyavailabletothem(e.g.R&Dtaxcredits)aswellasaregular,independentreviewofsectorfundingtoensurethatinnovatorsinthiskeysectorhavethefinancialresourcestheyneed.


Create a central hub of information about potential sources of funding / tax credits available to the RegTech industry.

Consider what could be done to boost the growth of RegTech firms outside of London and the South East as part of the UK Government’s Levelling Up agenda – potentially setting up regional ‘RegTech’ hubs.

Innovate UK to consider providing R&D funding to scaling RegTechs.


10 Improve BOARD EDUCATION, awareness and responsibility for RegTech

RegTechshouldbehigherontheagendaoftheboardsofregulatedfinancialinstitutions,whichmeansimprovingtheirlevelofeducationandawareness.FinancialInstitutionscouldconsiderhowtodevotemoreBoardtimetoRegTechorriskandcompliancetechnology–perhapsasastandingagendaitemwhererelevantorviaotherappropriatemechanisms.

RegulatorscouldalsousetheirpowersthroughtheSeniorManagersandCertificationRegime(SMCR)toensureSeniorManagerswhositontheBoardhaveadequatelevelsofknowledgeandunderstandingofRegTech.


Financial institutions should consider how knowledge and understanding of RegTech flows upwards in their organisations and consider regular briefings and updates in Board Meetings.

Financial institutions should consider levels of digital knowledge and expertise when appointing new Board Members.

The FCA could consult on how the SM&CR could better support the need for better RegTech knowledge and skills at more senior levels in regulated firms.

Financial institutions should review the responsibilities for decision-making about RegTech and ensure executives with the requisite skills (technology and compliance knowledge combined) are central to decisions relating to compliance technology.

11 Provide financial institutions with incentives to upgrade from legacy TECHNOLOGY to newer, more efficient systems

NewwaysneedtobefoundtoencourageregulatedfinancialservicesfirmstoupdatetheirlegacyinfrastructureandinvestinnewIT.OutdatedITisawellunderstoodbarriertoinnovationandistiedtofinancialfirms’riskaversionwhenitcomestoadoptingnewtechnologies.Moregranularknowledgeandunderstandingoftheparticularrisksandissuesinvolvedinreplacinglegacytechnology,andaviewfromtheregulatorsontheseriskswouldbeausefulfirststepinestablishingthetypeofregulatory‘carrots’and‘sticks’thatcouldbeappliedtosolvethisproblem.Onesuggestionisacombinationofatougherregimefortechnologyresilience(e.g.,aspartoftheFCA’sbroaderconsumerprotectionmandate)andfinancialincentivesforsmallerfinancialfirmstoinvestinRegTechsolutions(suchasthatoperatedbytheMonetaryAuthorityofSingapore).


Conduct further research into the specific issues associated with legacy technology platforms within financial institutions, exploring the risks and costs of replacement versus ongoing maintenance.

Select financial institutions might wish to consider developing a standard approach to adopting cloud technology, including the technology, processes and people required. This approach would hopefully be endorsed by the regulators and could be replicated by other firms.

4.5 Financial institutions recommendations


12 Reduce barriers to SCALE by streamlining vendor selection and procurement processes

Financialinstitutionsarealreadyactivelyreviewingtheirprocurementprocessestocreateamorestreamlinedandproportionateprocessforselectingandonboardingsmallertechnologyfirms.Thisworkiswelcomedandifpossible,theseprocessescouldbestreamlinedevenfurther.Itisclearthatworkingwithunknownvendorsstillposeriskstoafinancialservicesorganisation,butsomeoftheotherrecommendationsinthisreport,especiallytheRegTechTestingCentreareexplicitlydesignedtoprovideagreaterlevelofassuranceaboutsolutions.

GreatersharingofRegTechsuccessstoriesamongstpeerswouldalsobuildconfidence,especiallyifthisknowledgewaspooledinacentralmanner.Clarityprovidedbyregulatorsonthemanagementoftechnologyriskscouldalsoincludemoreexplicitexpectationsregardingtheproportionatemanagementofvendorrisk.InitiativessuchasTechNation’sFinTechPledge74 also provide a template that couldbeextendedtotheRegTechindustry.


Financial institutions might wish to consider creating specific partnership teams that can act as a point of liaison between internal procurement teams and external technology vendors that can help them to navigate the process.

Other measures could include involving procurement earlier on in the process or appointing RegTech leads or internal champions on a regional or more localised basis to help smooth out the process and provide additional information to the procurement teams.

74 https://technation.io/fintech-pledge/(AccessedFebruary2021)

Financial institutions should consider how they can share the knowledge and experiences they have of working with RegTech vendors in a standardised manner so this information can be fed into procurement risk assessment by their peers.

https://technation.io/fintech-pledge/


1. Glossary of terms

2. Research approach

Appendices


Appendix 1 – Glossary of terms

Abbreviation MeaningAI ArtificialIntelligence

AML Anti-MoneyLaundering

API ApplicationProgrammingInterface

APRA Australia’sPrudentialRegulationAuthority

ASIC AustralianSecuritiesandInvestmentsCommission

BoE BankofEngland

CIP Cyber,IdentityandPrivacy

CRTA CanadianRegTechAssociation

DLT DistributedLedgerTechnology

DRR DigitalRegulatoryReporting

ESG Environmental,SocialGovernance

FATF FinancialActionTaskForce–Theglobaloversightbody foranti-moneylaunderingandcounter-terroristfinancing

FC FinancialCrime

FC/FinCrime FinancialCrime

FCA FinancialConductAuthority

FI FinancialInstitution

Firmographics Thestructureandcharacteristicsoftheorganisations–technology vendors, regulatory bodies and financial services institutions–whocontributeddataandinsights totheproject.Keyfirmographictraitsincludesize,category,roleandgeography.

FSI FinancialServicesInstitution

FTE FullTimeEmployee

GC/GenComp GeneralCompliance

GFIN GlobalFinancialInnovationNetwork

HKMA HongKongMonetaryAuthority

HMT HerMajesty’sTreasury

KYC KnowYourCustomer–KYCguidelinesrequirethatfinancialservicesfirmsmakeaneffort toverifytheidentity,suitability,andrisksinvolvedwithmaintainingabusinessrelationship.

Legacy Technology /Infrastructure

Anold/outdatedmethod,technology,computersystem,orapplicationprogram

MAS MonetaryAuthorityofSingapore

MIT MarketIntegrity&Transparency

ML MachineLearning

PoC ProofofConcept

PRA PrudentialRegulationAuthority

RDIM RegulatoryDataandInformationManagement

RPA RoboticProcessAutomation

RR RegulatoryReporting

RRAC RegulatoryRiskAnalyticsandCalculations

TC/TaxComp TaxCompliance

Tech Sprint Asetperiodoftimeduringwhichspecificworkhastobecompletedandmadereadyforreview.

Technology Stack Alistofallthetechnologyservicesusedtobuildandrunaparticularfunction


Appendix 2 – Research approach

TheresearchpresentedinthisreportwasexecutedbetweenOctoberandDecember2020,andhadfivekeyobjectives:

1. ProvideabetterunderstandingofthebarrierstoinnovationandtheadoptionofRegTechbyUK-basedfinancialservicesinstitutionsFSIs

2. RevealinsightsaroundtheimpactoftheglobalCOVID-19pandemiconUKRegTech

3. SpotlightkeycontrastingtrendsintheRegTechcategoriesofFinancialCrimeandRegulatoryandComplianceManagement

4. Highlightinternationalbest-practicesthatsupporttheadoptionofRegTechinotherjurisdictions,andenhancethecompetitivenessoftheirsectors

5. Outlineasetofclear,actionablerecommendationsforconsiderationbyUKpolicymakers,regulatoryauthorities,technologyvendorsandregulatedinstitutions

Toachievetheresearchobjectives,theresearchapproachwasdevelopedusingablendofsurveyfieldworkandexpertindustryinterviews.Intandem,thesequalitativeandquantitativefindingsprovidearobustfoundationforanalysingtheUKRegTechsector(seeFigure5.1).

Research design

ItwascriticaltotheresearchobjectivesthatthisresearchtookintoconsiderationnotjusttheviewsandexperiencesofRegTechvendorsbutalsoofthebuyingcommunity–financialinstitutions–andregulatorsfromseveraljurisdictions.

Toachievethis,theresearchwasdesignedtobeconductedinthreephasesoffieldwork,combiningbothquantitativeandqualitativemethodstomaximisethepossibilitiesofcross-validationandaddtotheholisticunderstandingoftheissues.

Thefirstphasewasaquantitativesurvey,aimedatRegTechvendorsoperatingprimarilyintheUK.Thesurveywascompletelyanonymousandconsistedof28questions. ThesurveyranforthewholeofNovember2020.

Thesecondphasefollowedupthesurveywithaseriesofvendor-focusedroundtablestovalidateandgainfurtherinsightsontheinterimsurveyfindings.

Finally,inparallelwiththesurveyandroundtables,aseriesofqualitativeinterviewswereconductedwithrepresentativesfromfinancialinstitutionsandsevenregulatorsfromtheUKandoverseas.

Followingthedatacollection,theresultswereanalysedinaseriesofworkshopswiththeresearchteamtoderiveinsightsthataddressedtheresearchobjectives.

In Q4 2020, a detailed online survey of 161 global RegTech vendors was conducted, focusing on four key areas of enquiry...

Firmographics: questions on size, location and RegTech category permit deep segmentation.

Perceptions: questions on demand, performance, and factors influencing their ability to win business, as well as leading global practices they would like to see replicated in the UK market.

Core Themes: vendors asked for views on the impact of COVID-19 on UK RegTech, planned innovation priorities and the types of support they wanted from regulators and policy makers.

Spotlights: vendors also asked for views on two contrasting RegTech categories - Financial Crime and Regulatory & Compliance Management.

In Q4 2020, a detailed online survey of 161global RegTech vendors was conducted

Online vendor roundtables were usedto validate the survey responses

Detailed interviews with industry/regulatory stakeholders provided a 360-degree view

A representative subset of vendors were then invited to attend a series of three 90-minute follow-up virtual roundtable sessions...

The purpose was to validate our early survey results(based on an interim sample of 114 responses) and to support their interpretation.

Sessions were attended by senior-level representatives from 14 global RegTech vendors. These included 6 providers of financial crime prevention solutions in areas such as AML, sanctions monitoring and fraud detection. The remaining 8 vendors represented other solution areas, including regulatory reporting and general compliance.

Attendees represented small, medium and large RegTech firms from a range of geographies (inc. France, UAE, UK, and the US).

Discussion focused on key themes such as barriers to adoption, desirable policy interventions and the impact of COVID-19, providing strong validation for the survey.

To support our survey findings, 13 one-hour interviews were conducted with a range of non-vendor industry stakeholders, including...

Heads of Innovation, RegTech and/or Policy at 7 leading international regulatory bodies, in the UK, Australia, Canada, Singapore and the US.

Heads of Compliance, RegTech and/or Policy at 6 leading global financial institutions, including 1 universal bank, 2 asset managers, 1 global insurer, 1 wealth manager and 1 retail-focused “neobank”. These firms were headquartered in the UK, Switzerland and the US.

Interviews were structured around a three-layer core methodology designed to test common and specific themes for each stakeholder group.

The interviews provided the essential perspective of the buyers of RegTech and their supervisors, who together represent a large chunk of the UK RegTech ecosystem

-

After the quality-assuring the responses, 125 were found to have met our threshold quality criteria. These were carried forward and represent the “Voice of the

Vendor” in UK RegTech.

An extensive, multi layered primary research approach, in tandem with an expansive literature review delivered a strong, representative basis for analysing the UK RegTech sector, addressing the full range of key objectives set at the start of the project.

Figure 5.1 Overview of three-phase research approach


Quantitative fieldwork approach – RegTech survey

InOctober2020,adetailedonlinesurveyofRegTechvendorswaslaunchedtomarket.Thesurvey,which wasfullyanonymised,soughttheviewsofglobaland UK-basedRegTechfirmsservingUKfinancialservicesclients,withquestionsrangingacrossfourkey dimensions(seeFigure5.2).

Figure 5.2 Layered survey design focused on key report themes

Intotal,28questionswereposedinthesurvey.Thesewereansweredby161qualifyingvendors75.Oftheseresponses,125metthequalitythresholdofthesurveymethodology76,formingthefinalbasisfortheanalysispresentedhere.

Thesurveyfeaturedarangeofdetailedfirmographic77 questionsthatwereusedtoprofiletheresponses.Vendorsself-selectedfromalistofRegTechsolutioncategories78,roletypes(e.g.,Founder/CEO,ProductSpecialist,Sales),sizebands(basedontotalFTEs79)andgeography.Thesedetailedfirmographicssupported

75 Toqualifyforinclusioninthesurvey,respondentsneededtoholdaseniorpositionataRegTechvendorcompanythatwassellingitssolutionstofinancialservicesbuyersintheUKmarket.

76 Themethodologyrequiresrespondentstoansweratleast30%ofthefullsurveytoqualifyforinclusioninthefinaldatasetusedtodrivetheanalysis.

77 Theterm‘firmographics’isusedtodescribethestructureandcharacteristicsoftheorganisations–technologyvendors,regulatorybodiesandfinancialservicesinstitutions–whocontributeddataandinsightstotheproject.Keyfirmographictraitsincludesize,category,roleandgeography.

78 Forconsistency,thisreportleveragesthepublishedRegTechtaxonomyasoutlinedinSectionTwo.

79 FTE=FullTimeEmployees

extensivesecond-andthird-levelanalysisofresponses,addingadditionalrichnesstothestudy.

VendorswerethenaskedarangeofquestionsregardingthebusinessenvironmentforUKRegTechin2020,aswellastheirperceptionsofthefactorsdriving(orimpeding)their success.

KeyquestionstovendorsontheUKbusinessenvironmentincluded:

• HowtheyratedthecurrentlevelofRegTechadoptionbyUKfinancialservicesinstitutions(FSIs)(e.g. high, moderate or low)

• HowtheyratedthecommercialenvironmentforRegTechintheUK(e.g. strong, moderate or weak demand for solutions)

• Theirratingsofarangeofinternalandexternalbarriers80holdingbackthegreateradoptionofRegTechsolutionsbyUKbuyers

• TheextenttowhichtheyagreedwitharangeofstatementsrelatingtoRegTechintheUK(e.g.“The regulatory framework in the UK is digitally-enabled”)

Vendorswerealsoaskedaseriesofquestionsregardingtheirbusinessperformanceinthecontextofthebusinessenvironmenttheyhaddescribed.Thesequestionsdugintotheself-perceptionofRegTechvendors,aswellastheirsalesexpectationsfor2020and2021.

Keyquestionsrelatingtobusinessperformanceincluded:

• HowUKsalesofRegTechsolutionsin2020wereexpectedtoperformcomparedwith2019sales(e.g.up,downorunchanged)

• HowUKsalesofRegTechsolutionswereforecasttoperformin2021(e.g.up,downorunchanged)

• Howthepandemichadimpactedsalesin2020,andhowitwasexpectedtoimpactsalesgoinginto2021(e.g.adriverofgrowth,abarriertogrowthorneutral)

Thesurveyalsoexploredotherkeythemesdrivingthestudy,andrespondentswereinvitedtoelaborateontheirfutureproductdevelopmentroadmaps,thefactorstheyfeltwouldmosthelptodrivethefuturesuccessofUKRegTech,andtheinitiativestheymostwantedtoseeannouncedbyUKregulators.

Keythematicquestionsincluded:

• Whichaspectsoftheirsolutionstheywereinvesting intoenhancetheirofferings(e.g. cost, interoperability or the utilisation of new technologies)

• WhichfactorshadthegreatestpotentialtodrivefuturegrowthinUKRegTech(e.g. increased availability of

80 Internalbarriersincludeprocurementprocesses,accesstotrainedstaffandbudgetavailability,whileexternalfactorsincludetheCOVID-19pandemicaswellasthewideroutlookfortheUKeconomy.

Firmographics

Drivers, barriers & vendor perceptions

Questions about the size, type, location and role of respondents are baked into the survey script to support second-line analysis.

Questions about the benefits of RegTech, barriers to adoption and perceptions of a series of industry statements provide a current view of how vendors are feeling about their sector.

Performance & desired measuresQuestions on the impact of COVID-19, drivers of/barriers to

future growth, innovation roadmaps, desirable regulatory initiatives, revenues and outlook for 2020-21 provide a view on

performance, priorities and what vendors believe will help them.

Tailored deep dive questionsTailored questions focusing on financial crime (e.g. anti-

money laundering and fraud) and regulatory change management provide deeper insight to support the focus

areas of our report.

1

2

3

4

Fig 5.2 Layered survey design focused on key report themes

Source: RegTech Associates (RTA)


growth capital, wider adoption of cloud technology, et al)

• WhichregulatoryinitiativeswouldmosthelptheirownUKRegTechbusinessestobemorecompetitive(e.g. a list of regulator-approved vendors, clear data standards, et al)

• TheanticipatedbenefittoRegTechadoptionofprovidingUKregulatoryrulesinadigitalformattoregulatedfirms(e.g. positive, negative or neutral)

Attheendofthesurvey,firmswereinvitedtoprovideviewsonthetwofocuscategoriesoffinancialcrimeandregulatoryandcompliancemanagementselectedforthereport.Inaddition,theywerealsoinvitedtoexplainintheirownwordswhattheirowndemandswouldbetotheUKGovernmentandregulators,aswellasanymeasurestakenbyothernon-UKjurisdictions,theywouldcallparticularattentiontoasleadingpracticeindrivingtheadoptionofRegTech.

Firmographic characteristics of RegTech contributors – survey respondents

ThisstudybenefitsfromdataandinsightscontributedbyalargeandrepresentativesampleofglobalRegTechvendors,regulatorybodiesandfinancialinstitutions.Thesamplegroup,comprising125surveyrespondents,14virtualroundtablevendorcontributorsand13interviewees(Totaln=152)canbesegmentedinanumberofways.

Figure5.3belowshowstherepresentativedistribution ofvendorsservingtheUKmarketacrossprimarybusinessareasorRegTechsolutioncategories.

FinancialCrimesolutionvendorscomprisemorethanone-quarterofthetotalsample(26.4%),closelyfollowedbythoseintheRegulatoryandComplianceManagementcategory(18.4%).Thisdistributionofvendorsreflectsthecategory-compositionofthewiderUKmarket(seeFigure5.4).Importantlytoo,itsupportsakeyresearchobjectiveoftheprojectbydeliveringasignificantsampleofrespondentsinthetwofocuscategoriesselectedfordeeperanalysis.

Figure 5.3 Breakdown of survey respondents by primary business area (n=125)Question: “Which of the following best describes your primary business area?”


Fig 5.3 Breakdown of survey respondents by primary business area (n=125)

Question: “Which of the following best describes your primary business area?”

Source: UK RegTech Vendor Survey 2020 (City of London Corporation/RTA)

ESG ........................... Environmental,Social,GovernanceTaxComp ............ TaxComplianceRCM ......................... RegulatoryandComplianceManagementFinCrime.............. FinancialCrimeMIT ............................ MarketIntegrityandTransparency

RRAC ....................... RegulatoryRiskAnalyticsandCalculationsGenComp ........... GeneralComplianceCIP ............................. Cyber/Identity/PrivacyRR .............................. RegulatoryReportingRDIM ....................... RegulatoryData&InformationManagement


AsFigure5.4shows,thesurveyprovidesgoodcoverageacrosstheRegTechlandscape,withconsistentsamplesizesinmorespecialisedniches.Forexample,theRegulatoryRiskAnalyticsandCalculationscategory,whichaccountsfor4%oftheunderlyingsample.Furthermore,asFigure5.4shows,thesurveycoveragemapswelltothewiderRegTechpopulationfromtheRegTechAssociatesdatabaseservingtheUKmarket,albeitwithadeliberateskewintothespotlightareasofFinancialCrimeandRegulatoryandComplianceManagement.

Turningtosizebands,Figure5.5showsarepresentativesplitofsurveyrespondentsbasedontheirnumberoffull-timeemployees(FTEs).

RegTechvendorsizewasbrokendownintoLarge(thosewithmorethan50fulltimeemployees)andSmall,thosewithfewerthan50fulltimeemployees).AsFigure5.5shows,thereisarelativelyevensplitbetweeneachgroup,withLargeRegTechscomprising43.8%ofthesampleandtheremaining56.2%representingSmallRegTechfirms.

Figure 5.4 Category of UK RegTech market (from survey sample) vs global RegTech population

Figure 5.5 Breakdown of survey respondents by number of full-time employees (n=125)Question: “How many employees does your organisation have?”


0 Percentage 20 40 60 80 100

Whole directory data set

Survey sample

Fig 5.5 Breakdown of survey respondents by number of full-time employees (n=125)

Question: “How many employees does your organisation have?”



TherewasalsoastrongbalancebetweenUK-registeredRegTechvendorsandnon-UKfirmssellingintotheUKmarket,illustratedbyFigure5.6.

Morethanhalfofrespondents(52.8%)werebasedintheUK,withthebalanceoffirms(47.2%ofthesample)dividedacrossContinentalEurope,NorthAmerica (i.e.US&Canada),AsiaPacificandtheMiddleEast&Africa(MEA).

Almosttwo-thirds(59.6%)ofthisnon-UKcontingentemployedlessthan10%oftheirtotalglobalworkforceintheUK.However,13.5%employedmorethan20%oftheir

worldwideFTEintheUK,ofwhich5.8%employedmorethan50%,underliningtheimportanceoftheUK asaglobalhubforRegTechinvestment.

Closertohome,Figure5.7belowshowsthedistributionofUKRegTechs(n=80)whorespondedtothesurvey.Asmightwellbeexpected,thereisastrongskewtowardsLondon(75.0%)andtheSouthEast(8.8%)asthebaseofoperationsforthemajorityofrespondents(83.8%).Theremainingone-sixth(16.2%)wereevenlydistributedaroundotherpartsofEnglandandNI.However,thesurveydidnotattractresponsesfromWelshorScottishRegTechs.

Fig 5.7 Geographic distribution of UK survey respondents, by region (n=80)Figure 5.7 Geographic distribution of UK survey respondents, by region (n=80)

Source: RegTechAssociatesanalysisofRegTechSurveyresponses

Fig 5.6 Geographic distribution of survey respondents, HQs by region (n=125)

Question: “Are you headquartered in the UK? If ‘no’ in which country is your firm headquartered?”


Figure 5.6 Geographic distribution of survey respondents, HQ by global region (n=125)Question: “Are you headquartered in the UK? If ‘No’ in which country is your firm headquartered?”



Figure 5.8 Distribution of survey respondents by functional role (n=125)Question: “Which of the following titles best describes your role within the organisation?”


Thesurveyalsoboastsahighnumberofrespondentswhoareseniordecisionmakerswithintheirorganisations.AsFigure5.8shows,almosthalf(46.0%)ofthosewhocompletedthesurveyself-identifiedas“Founder/CEO”,withafurther11.2%describingtheirroleas‘OtherC-Suite’.

Thesurveyresponsesreceivedweredrawnfromallthekeyfunctionalareasoftheseorganisations,representingsenior-levelstaffacrosssales,marketing,productdevelopmentandstrategy.

Thesamplealsoshowsagoodmixofproductmaturitywithintherespondentgroup.AsFigure5.9shows,two-thirdsofrespondents(68.5%)areactivelysellingtheirproductstomarket,withaclientbaseofatleast10institutions.Afurtherone-quarter(27.5%)aredrawnfromarangeofearlierstagefirmswitheitherasolidproofofconceptorminimumviableproducttoscalingfirmswith5-10clientsontheirbooks.

Fig 5.8 Distribution of survey respondents by functional role (n=125)

Question: “Which of the following titles best describes your role within the organisation?”


Fig 5.9 Distribution of survey respondents by product stage (n=125)

Question: “At what stage is your product?”


Figure 5.9 Distribution of survey respondents by product stage (n=125)Question: “At what stage is your product?”



Qualitative fieldwork approach – roundtables

Roundtableswereheldtovalidateandsupporttheinterpretationoftheinterimsurveyfindings(basedonamoment-in-timesampleofn=114)waspresentedtoaroundtablegroupofRegTechvendors.Senior-levelrepresentativesfrom14globalRegTechvendorsparticipatedcomprising:• 6vendorssourcedfromthefinancialcrimecategory.

• 8vendorsfromarangeofotherRegTechcategoriessuchasCIP,regulatoryreportingandgeneralcompliance.

Vendorswereaskedtoreviewasetofearlyfindingsandprovidetheirviewsin particular onthebarrierstoinnovation(includingregulatorybarriers)andtheinternationalleadingpracticesforenhancingcompetitivenessidentifiedinthesurvey.Additionally,thevendorpanelswereinvitedtocommentonanearlysetofdraftrecommendationsthathadbeengeneratedfromtheinterimsurveyfindings.

Firmographic characteristics of RegTech contributors – roundtable attendees

Theroundtablesessionswereattendedbysenior-levelrepresentativesfrom14vendors,withabalancedsplitbetweenvendorsfromFinancialCrimeandnon-FinancialCrimecategories,asshowninFigure5.10.

Qualitative fieldwork approach – institutional and regulatory interviews

Addingtotheliteraturereview,vendorsurveyandroundtables,aseriesof13semi-structuredone-hourinterviewswereconductedwithrepresentativesfromglobalregulatorsandfinancialinstitutions.Interviewswerestructuredaroundamulti-layercoremethodology,similartothatemployedinthesurvey,anddesignedtotestcommonandspecificthemesforeachstakeholdergroup.Theseinterviewswerewrittenupandanalysedandwereusedasanimportantinputintotheinterpretationoftherestoftheprimaryfieldworkactivityconductedforthereport.Intervieweeswereselectedfrombothfinancialinstitutionsandregulatoryauthorities.RepresentativeswithexperienceandknowledgeofRegTechandinnovationmoregenerallyweretargeted,thoughmuchofthesamplingwasopportunistic.Interviewswereheldonananonymisedandconfidentialbasis,wererecordedwithpermissionandtranscribedtoenabledetailedanalysis.Theinterviewscontainedsomecommonquestionsforbothregulatorsandfinancialinstitutions,theseconcernedthefollowingbroadthemes:

• Theroleofintervieweesandthenatureoftheteamstheyworkfor

• ThelevelofRegTechexperiencepossessedbytheinterviewee

• TheirviewsontheexistingUKregulatoryframework

Figure 5.10 Distribution of vendor roundtable attendees by RegTech category (n=14)

Source:RegTechAssociatesAnalysisofRegTechVirtualRoundtableParticipants


• TheirviewsonthecurrentbestandworstRegTech use cases

• TheirviewsonthelevelsofadoptionofRegTechintheirlocaljurisdictions,aswellasthebalanceofadoptionacrossdifferentfinancialservicessub-sectors(e.g. retail financial services, capital markets, insurance et al)

Totapintotheuniqueandvaluableexperienceofeachindividualcohort(i.e.regulatorsandregulatedinstitutions)differentsetsoftailoredquestionswereusedwitheachgroup.

Keyquestionsposedtoregulatorsincluded:

• TrendsobservedinRegTechadoptionbythefirmsthey supervise

• ThesuccessesandfailuresofmeasurestakentosupportthegrowthofRegTechintheirlocaljurisdictions

• TheextenttowhichtheythemselvesmadeuseofRegTechorSupTech(i.e.SupervisoryTechnology)aspartoftheirday-to-daysupervisoryactivities

• Theirviewsontheanticipatedfuturedevelopment ofRegTechintheirjurisdictions

Incontrast,regulatedinstitutionswereaskedadifferentsetofquestionsconcerning:

• WhetherRegTechwasafrequenttopicofdiscussionwithregulators

• Themechanismstheyusedtoidentify,learnabout andassessnewRegTechproviders

• TheirviewsonthebarrierspreventingthemfromdoingmoretoadoptnewRegTech

• Theirown‘RegTechjourneys’andfutureplansforimplementingnewsolutions

Interviewtranscriptsweresubjectedtothematicanalysis,andwherethesethemesoverlappedwiththoseofthesurveyandroundtables,theywerecomparedandaddedtothesurveyfindingstoenrichtheanalysisandprovideamoreroundedviewoftheresearchthemes.

Firmographic characteristics of RegTech contributors – interview respondents

Inallcases,intervieweeswereselectedbasedontheirexpertiseinRegTechandastrong,well-foundedpointofviewoncomplianceinnovation.

Aswiththesurvey,allinterviewswereconductedonthebasisofstrictanonymity.Consequently,thefirmographicdetailsthatcanberevealedwithinthisreportarenecessarilymorelimited.

TheinterviewsconductedwithregulatorsincludedHeadsofInnovation,RegTechProgrammeLeadsandHeadsofPolicyfromseveninternationalbodies.Figure5.11showsthegeographicdistributionofregulatoryinterviewees.

Interviewswithregulatedfinancialinstitutionsalsodrewonaworldwidesampleoffirms,fromtheUK,EuropeandtheUS.HeadsofCompliance,RegTechProgrammeLeads

Fig 5.11 Distribution of regulatory interviewees by geography (n=7)

Source: RegTech Associates Analysis of RegTech Regulatory Interview Participants

Figure 5.11 Distribution of regulatory interviewees by geography (n=7)

Source:RegTechAssociatesAnalysisofRegTechRegulatoryInterviewParticipants


andHeadsofPolicyat6leadingglobalfinancialinstitutionswereinterviewed.Figure5.12showsthedistributionofintervieweesbyfinancialservicessub-sector.

Insum,theanalysispresentedheredemonstratesthatthisstudyisbuiltonasolidandexpansivemethodology,anddrawsinsightandinspirationfromeachcriticalgroupofactorsintheUKRegTechecosystem.

Fig 5.12 Distribution of institutional interviewees by financial services sub-sector (n=6)

Source: RegTech Associates Analysis of RegTech Institutional Interview Participants

Figure 5.12 Distribution of institutional interviewees by financial services sub-sector (n=6)

Source:RegTechAssociatesAnalysisofRegTechInstitutionalInterviewParticipants


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Research team RegTechAssociatesconductedthisresearchinpartnershipwiththeCityofLondonCorporation.TheteamwasledbyDr.SianLewin,Co-FounderandHeadofClientDeliveryandResearch.SeniorResearchAssociate,RobStubbswasablyassistedbyResearchAnalystsNathanParkerandJackRowbotham.TheCityofLondonCorporationprojectteamwasledbyWendyPham,SeniorPolicyAdviser.

RegTechAssociatesisaresearchcompany,andweuseouranalysistoprovidestrategicinsightandadvicetoourclients.WebringallsidesofthemarkettogethertohelpRegTechvendorsgrowandregulatedfirmsmanagecompliancemoreeffectively.Foundedin2017,RegTechAssociatesisaprivatelyheldcompanybasedinLondon.Ourexperiencedteamhaveextensiveindustryandregulatoryknowledgeandweoftencollaboratewithleadingregulatorstofosterdialogueandindustrycollaborations.

Other initiativesThisresearchprojectwasrunningatthesametimeastheFinTechStrategicReview,headedbyRonKalifa.GiventhattheCityofLondonCorporationwasalsoheavilyinvolvedinthisreview,theCityofLondonCorporationprojectteamensuredthatsufficientlevelsofknowledgeweresharedbetweenthetwoprojectstoallowanyareasofoverlaptobeappropriatelyconsidered.

AcknowledgementsTheCityofLondonCorporationandRegTechAssociateswouldliketothankallofthosewhoparticipatedinandsupportedthisresearch,namely

• TheRegTechvendorswhotookthetimetocompletethesurveyandcontributetotheroundtables

• Theinterviewparticipantsfromfinancialinstitutionsandregulatoryauthoritieswhosogenerouslygavetheirtimeandknowledgetotheproject

• ThewiderteamsattheCityofLondonCorporationfortheirassistanceandinputthroughoutthecourseoftheproject

• Therepresentativesofthekeystakeholdergroupsforthisresearch–theFCA,BankofEnglandandHMTreasury–fortheirinsightsthathaveassistedusindevelopingourfindingsandrecommendations.

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rtassociates.co

RegTech Associates is a research company and we use our analysis to provide strategic insight and advice to our clients. We bring all sides of the market together to help RegTech vendors grow and regulated firms manage compliance more effectively. Founded in 2017, RegTech Associates is a privately held company based in London. Our experienced team has extensive industry and regulatory knowledge and we often collaborate with leading regulators to foster dialogue and industry collaborations.

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