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RegTech market episode 3: a golden hi-tech future

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A bright technological future

This third blog post about the RegTech market is focused on the growing costs of this business sector, which suggest a very bright future for the technological solutions dedicated to regulatory intelligence. In the previous episodes of this series, we have defined what the RegTech is and we have proposed an in-depth look both at the European and the Italian financial systems.

More rules, more (compliance) costs

Following the 2008 financial crisis, a progressive regulation process has started in the banking system, aimed to avoid the creation of the same conditions which generated that crisis. This process is still evolving nowadays both in the international (BCBS) and European (EU, EBA) sectors on one hand, but also in the Italian one (Banca d’Italia, Consob, ISVAP, Covip, UIF) on the other. Just as an example, today in Italy a bank needs to take into account more than 20 regulatory entities in its compliance evaluation.

This continuous trend has caused the companies to add in their staffs specific compliance structures, which are responsible for:

  • regulations evolution monitoring
  • policies adjustments
  • business processes in coordination with other control functions
  • reactions to external events
  • reports about the compliance risks level to the Board of Directors

Of course these interventions require investments. To incorporate all these expenses, the expression compliance costs is commonly used to define the sum of all the costs incurred by the financial system to face the regulations growth and changes. A specific study regarding this situation has estimated that these costs will constantly increase up to 10% of revenue in 2022 (Duff & Phelps).

Consequently, despite the complessive credit institutions number contraction, the compliance costs for the whole banking sector have been progressively growing in the last 12 years, with a relevant element constantly represented by the needs of regulatory updates identification and analysis.

In technology we trust

Financial entities need quick and efficient solutions to face this situation. They have been allocating new budgets to reduce the potential non-compliance risk and to reduce the compliance costs, searching and choosing adequate digital support solutions. Including the RegTech ones, which generates more and more the perception to have a positive impact.

In July 2020, EY published its yearly Regulatory Inventory Survey Report, noticing that the G-SII banks (Global Systemic relevance banks) are getting interested in the use of Artificial Intelligence for the automatic management of the legal inventories that are necessary for the compliance activities. Going deeper in these technologies, reference is made to engines of Natural Language Processing (NLP), Natural Language Understanding (NLU), but also to semantic analysis and deep learning techniques. These technologies will be the core of the solutions that will change the RegTech market, as confirmed by the Thomson Reuters 2021 Report. The next stop in our journey through RegTech will be... the Supervisory Technology - the so called SupTech: don't lose it!

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