Three elements drive interest in regulatory tech

Sibahle Malinga
By Sibahle Malinga, ITWeb senior news journalist.
Johannesburg, 09 May 2018
Dominique Collett, senior investment executive at Rand Merchant Investment Holdings.
Dominique Collett, senior investment executive at Rand Merchant Investment Holdings.

The three elements driving interest in regulatory technology (regtech) within SA's financial services industry are the simplification of regulatory compliance processes, customer demand for an enhanced experience and cost reduction.

This is according to Dominique Collett, senior investment executive at Rand Merchant Investment Holdings and head of AlphaCode, a club for fintech entrepreneurs.

Collett believes the onerous regulatory compliance requirements, which continue to grow for financial services firms, will be countered by the rise of regtech solutions such as 'know your customer' (KYC) identity tech, behavioural analytics software and risk analytics tools.

These technologies, she adds, will strike a balance between reducing manual processing hours, improving accuracy and preventing fraud, while also saving costs for organisations within the local financial services industry.

"While regtech is mainly aimed at addressing compliance, risk management, regulatory reporting and transactions monitoring, the focus in SA has been largely on identity management.

"These technologies enable financial services firms to design better customer experiences and make the regulatory checks seamless and less cumbersome for customers. They also allow banks, asset managers and insurers to more adequately assess and monitor risk, which ultimately helps them streamline processes and reduce costs," explains Collett.

Financial services providers, she continues, are constantly slapped with huge fines for not doing KYC properly on account of human error.

Local fintech firms such as digital KYC solutions company DocFox, mobile authentication solutions firm Entersekt and compliance tech firm StriderTech help to remove regulatory compliance barriers, while enhancing the customer experience through automating the compliance process and making it more accurate through the use of machine learning.

According to a Juniper Research report, spending on regtech will grow by an average of 48% per annum over the next five years, rising from $10.6 billion in 2017 to $76.3 billion in 2022, as banks and financial services firms seek to avoid costly regulatory fines.

Brennan Wright, head of marketing at identity verification and compliance company ThisIsMe, says the current staffing component dedicated to regulatory compliance within financial services organisations will fall to 1% to 2% by 2025, as new regtechs are introduced.

"Technologies such as risk data aggregation and reporting tools, fraud detection tools and client onboarding systems will continue to empower compliance teams in the short term and will eventually replace many back-office positions; especially those mundane and admin-intensive roles.

"The theme of change will favour legal and compliance teams that are technically savvy, have the necessary creative foresight and an ability to leverage the rapid innovation necessary to keep costs down, systems running smoothly and regulation in check," Wright points out.

Discussing customer demand for an enhanced experience, Eitan Stern, director of legal solutions agency Legalese, explains: "Innovative entrepreneurs in the fintech space are incentivised [in taxes] to make the customer experience seamless through compliance. The problem is that not all entrepreneurs prioritise consumers over their own platform. This is where regulations are important as they keep the industry safe as a whole, while ensuring customer requirements are met."

Regulatory compliance

While the Protection of Personal Information (POPI) Act was signed into law on 26 November 2013, it is not yet fully operational. Once it is made effective, companies will have a year's grace period to become compliant with the Act. The General Data Protection Regulation (GDPR) commenced on 24 May 2016 and its grace period ends on 24 May 2018.

John Giles, legal services provider at law firm Michalsons, says new regulations such as POPI and the GDPR will increase the use of regtech within the local financial services industry.

"It is an almost impossible task for an organisation's in-house legal advisers, compliance officers or company secretary to continuously monitor new regulatory developments as they are already under strain to implement these requirements and monitor compliance. Therefore, technology will play a significant role to comply with regulations and it can also save a significant amount of time and achieve the goal more accurately."

Collett adds that although governance and compliance is not new in SA, the new regulations will place more focus on the storage and extraction of personal information.

"These new regulations are going to require financial services companies to engage with technology more frequently to enable them to comply. Technology makes it a lot simpler to verify customer transactions and ensure clients have consented to the use and storage of their data.

"Every time new legislation comes in, it opens up waves of opportunities for new start-ups, who understand technology and regulatory processes, to launch new offerings," she concludes.