What’s the state of the US RegTech?

RegTech is going from strength to strength. But will the good times keep on rolling in the US?

The global RegTech sector is booming. What was once a sector that only attracted $923.4m in 2014 has exploded into an industry that has drawn in investment worth $6.53bn in the first three quarters of 2019, eclipsing the $4.48bn invested throughout 2018 in total, according to RegTech Analyst’s data.

But it is no secret why the RegTech industry is growing. “Creative problem solving in the technology community, coupled with the increasing openness of banks to using new solutions, has contributed to this consistent growth,” says Marc Gilman, general counsel and vice-president of compliance at Theta Lake, the RegTech company providing a compliance platform for voice and video communication.

He also suggests that the growth is only set to continue. “Banks’ continued focus on efficient and effective compliance processes will drive further development, investment, and adoption of RegTech tools,” Gilman tells FinTech Global.

US firms have consistently attracted the bulk of this investment, even if there may be signs that its share is decreasing. Whereas North American firms attracted 67.2% of the total RegTech cash injections in 2014, this chunk had shrunk to only 51.2% in 2018, according to RegTech Analyst’s data. That being said, so far North American firms have received 65% of the investments in 2019.  

But that does not mean that the industry do not have obstacles to overcome. “The two key challenges for US RegTechs are data security and regulatory expertise,” Gilman says.  “Given increasing regulatory requirements around data privacy and security, these issues must be top of mind for any RegTech.  Whether it’s completing a SOC 2, Type 2 audit or aligning to uniform standards like those from the Cloud Security Alliance, RegTechs must put security first.”

And, just like everywhere else where RegTech enterprises offer up their solutions, the ones operating in the American market must make an effort to understand the nuanced regulatory mandates that apply to both products and to the specific business and compliance problems that their customers are trying to solve. “RegTechs launched without domain-specific legal and regulatory expertise will find it difficult to gain traction in an increasingly specialized and discerning marketplace,” Gilman states.

So where will the US RegTech space go next? “I believe there will be an increased focus on investor protection and a corresponding proliferation of RegTechs developing platforms to enable compliance in areas where it has previously been impossible or impractical,” Gilman ventures a guess.

He suggests that regulators both in the US and across the pond are – and will continue to be – focused on how firms communicate.

As an example, Gilman points out that the U.S. Commodity Futures Trading Commission recently fined two interdealer brokers: BGC Financial and GFI Securities. It accused them of having falsely stated that certain bids and offers were executable and that certain trades had occurred. They were in total ordered to pay $25m.

Similarly, the UK’s top market regulator the Financial Conduct Authority slammed the Prudential Assurance Company with a £23.87m fine in the beginning of October, accusing the company of some “very serious breaches” relating to how Prudential talked to customers over the phone about annuities sales.

Gilman also believes that RegTech firms will have to focus more on collaboration platforms like Zoom and Microsoft Teams in the future as financial firms and other businesses are increasingly using them.

“RegTechs are developing solutions to facilitate oversight of all aspects of these applications – their video, audio, and text components –  which have historically been infeasible,” he says.

“Regulators have been silent on the application of existing regulatory regimes to collaboration platforms, but given the potential risks raised by their use, RegTechs and banks would benefit from clear guidance that supervision of these platforms is necessary and would, in fact, better protect investors. This is only one example, and I think that RegTechs will focus on reducing compliance risks for similar processes that have been unmonitored or managed with manual workflows.”

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