Digital transformation, hybrid working and ESG – RegTech trends to watch out for in 2022

After a strong 2021, many RegTech companies are looking ahead to the new year with optimism for another year of advancement and greater innovation. With the pandemic still raging on, 2022 could be another year for RegTech companies to further ingrain themselves into the system. What trends should the industry look out for this year?

“The RegTech industry is a truly at a tipping right now” claims Clausematch CEO Evgeny Likhoded. “Digital transformation created an entirely new set of challenges for compliance teams, but now this environment has created a natural foundation for automation and collaboration. As organisations have become aware of the opportunities, the demand for technology has grown rapidly over the recent twenty months, and this expansion looks set to continue over the coming year.”

Likhoded believes there are four key trends that will play out in 2022. First, RegTech investment in financial services will spread to smaller players. He said, “To date, the vast majority of growth in RegTech has been driven by the financial services sector, with a significant acceleration due to the pandemic. As is to be expected, most of the initial investment has come from large, established financial institutions.” He cited a Thomson Reuters report from last year that found 81% of ‘global systemically important financial institutions agreed the pandemic had significantly increased reliance on tech solutions for compliance, while 73% cited the greater value of RegTech as its importance to operational management.

“In 2022, we can expect finance firms to continue prioritizing RegTech in their budgets. However, the Thomson Reuters report found that among G-SIFIs, 33% were planning to increase their RegTech budget over the next twelve months, while 42% said their budgets would remain the same. In contrast, the broader set of responses encompassing firms of all sizes found that the majority of firms were planning to increase spending. These numbers appear to indicate that we’ll see more demand for RegTech among mid-tier and small businesses that are growing and scaling fast.”

RegTech will also expand to new market segments, Likhoded believes – with regulated industries beyond finance adopting cloud-based compliance services. The Clausematch CEO believes insurance and healthcare are sectors where RegTech solutions could offer much value.

For the third trend – Lihkoded stated that an increased focus on sustainability will drive ESG compliance in 2022. He remarked, “Sustainability is a huge trend across the board, and it’s already become a compliance-based discussion following the introduction of the EU Sustainable Finance Disclosure Regulation in the summer of 2021. Around the same time, the US Congress passed the Climate Risk Disclosure Act. Both give powers to their respective financial regulators to demand that financial firms make disclosures on climate-related risks of their investment products.”

He highlighted that technology ‘as a leading catalyst in the sustainability transition’ will play a role in compliance with these regulations, and that to reach net-zero – the goal underpinning the disclosure requirements – the industry will need to allow technologies to step in.

The fourth trend imposed by Likhoded was the belief that cryptocurrency regulations will begin to emerge. He stated, “Institutional interest in cryptocurrencies has risen exponentially in 2021, as the value in the digital asset markets passed the trillion-dollar mark. Regulators were already urging caution towards crypto, but we can expect to see digital assets gain a more structured regulatory treatment and status for all major markets over the coming year or so. Any such regulations will create additional compliance obligations for crypto-native firms and traditional institutions that have integrated cryptocurrencies alike.”

Alongside the four trends, Likhoded stated while the last few years have thrown up plenty of challenges for firms in how they manage their compliance workload, the resulting focus on accelerating digital transformation during the pandemic has ‘lit the touchpaper’ of RegTech adoption.

In order for companies who are looking to scale deal with issues around increased risk and burdensome regulatory oversight, Likhoded commented that many organisations are implementing more technology to deal with compliance issues faster – and with those who do, it becomes a key differentiator that will ‘not only protect their business and customers but allow them to scale up and expand geographically’.

Hybrid working paradigm

A trend entering its third year in 2022 is hybrid working. Initially formed as a way to straddle working from home and working in the office during the early days of the pandemic, hybrid working has provided the global workforce with more flexibility in their working arrangements. However, regulatory and compliance challenges still abound in this area.

Stacey English – Theta Lake director of market intelligence – commented, “Regtech trends in 2022 will be predominantly driven by the hybrid and remote work paradigm across the industry. Collaboration platforms like Zoom, Microsoft Teams, Webex by Cisco, RingCentral, and Slack are now firmly embedded as the primary source for communications and information sharing in organisations. However, there’s still a lot of catching up to do on the regulatory and compliance aspects to ensure interactions in virtual settings have the same oversight and controls as those in physical offices.”

English highlighted a stream of regulatory guidance in the second half of 2021 provided a ‘marked warning’ that regulators expect firms to have robust compliance and supervisory controls whether in-office or remote. This included the FCA reminding companies any form of remote or hybrid working should not risk or compromise the firm’s ability to follow all rules, regulatory standards and obligations or lead to a failure to meet them.

She continued, “RegTechs that have been built for modern collaboration and chat tools will play a key role in 2022 in providing critical compliance and security controls, enabling firms to supervise, retain and protect data across what is spoken, shown, and shared on these platforms and proactively detect security, data loss, and compliance risks across the ever-increasing volumes of video, voice, chat, and document content. For the 83% of financial services firms that have resorted to turning off functionality within their communication platforms because of compliance concerns, RegTechs will provide not only critical compliance and security controls but also significant business advantages.

“Organisations will be able to unlock the benefits of the tools like Zoom, Microsoft Teams or Webex by Cisco they’ve invested in. Enabling the use of features such as in-meeting chat, polling and whiteboards in video meetings, all of which need to be supervised and retained to meet electronic written communications rules for MiFID II, FINRA and SEC, ensures staff can be productive wherever they work. Given the last two years have brought significant change, forcing us all to adapt and adopt technology and processes to stay connected, organisations will be looking to implement RegTech that fits seamlessly into their compliance environment. The flexibility to integrate with existing systems, archives and tools, and not disrupt compliance processes or end users, will be a practical and key trend in the successful adoption of RegTech.”

Rise of ESG

The growing importance of ESG in finance has risen parallel to the increasing presence of climate change issues on the global agenda. Going into 2022, this is likely to be no different – an opinion echoed by Regnology SVP of product management Bodo Windmöller. He said, “One of the key topics in 2022 is definitely ESG-related finance. ESG agendas are more and more at the core of our societies and companies, and they provide a huge catalyst for ESG investment. Governments are taking actions to shift financial flows to more sustainable economic activities.

Windmöller cited developments in Europe, where the EU published an update to its sustainable finance strategy in July 2021. This update outlined that there needed to be more progress in the banking and insurance sectors. He added, “The identification, management and reporting of ESG-related data and risks by banks and insurers are key for the EU’s economic transition towards the Paris climate goals. ESG factors will become part of risk management systems and supervision to a much greater extent than in the past and RegTech will play a crucial role in supporting this transition.”

Other trends highlighted by the Regnology SVP included developments in digital technology to change the financial market participants generate and exchange information. He stated, “In line with the European Commission’s Strategy on supervisory data in EU financial services of December 2021, this is the key to promoting data-driven innovations in the prudential, resolution and statistical reporting as well in the coming years.

“Corresponding core initiatives have been in design for several years by ECBS under the term ‘Integrated Reporting Framework (IReF)’ as a long-term strategy for banks’ data reporting, or the ‘Integrated Reporting System (IR)’ of EBA or the cooperation of EBA and SRB on integration of prudential and resolution data, whose implementation is expected in stages over the medium-long term. This will promote and facilitate the reporting and supervision of data.

“A prerequisite for this is that financial institutions and other companies active in the financial markets adapt their reporting procedures to this end and already be prepared to invest more in innovative regulatory technologies to streamline their processes. The goal to decrease costs and to raise data quality as well as transmitting the data to regulators faster and more efficiently so that supervisors are best placed to monitor risks and ensure the stability of the financial system.”

KYC and financial crime

In an age where more and more people are conducting their financial business online, the rise of financial crime may seem to go hand-in-hand with this trend. With such a challenge considered, a deeper focus on KYC is undoubtedly going to be a resulting response for companies looking to avoid such issues.

Christine Bailey – CMO of PassFort – believes perpetual KYC is going to be a key trend for 2022. She said, “Ongoing risk monitoring has always been a crucial part of KYC, but we’re seeing an increased focus on perpetual KYC across the financial services market. This is going to be a strong trend for RegTech in 2022.

“Following much-publicised AML failings and record fines globally last year, robust controls and ensuring they are maintained is where compliance time will be spent – and it’s where RegTech can help. Perpetual KYC to keep risk profiles live is an area where automation makes the difference. Compliance teams can rest assured automatic customer due diligence is running in the background with any changes in status flagged. This supports reporting of suspicious activity and limits exposure to AML failings.

“Financial institutions will obviously need access to accurate, real-time data to inform these customer risk profiles. And they will need to deliver this in a way that doesn’t disrupt ‘good customers’. Again, this is an area where RegTech workflows working seamlessly in the background on perpetual KYC will make the difference in 2022.”

With the age of online firmly taking hold across the majority of industries worldwide, companies and regulators alike are searching for ways to fight back the rising tide of financial crime the endangers the online lives of consumers worldwide.

According to KYC Portal CEO Kristoff Zammit Ciantar, collaboration in this area may be the order of the day. He professed, “Regulators will start to collaborate in strengthening defences to fight organized crimes. Many of the known regulatory bodies and technology providers have already begun taking part in projects that develop innovative AI technology to enhance investigations by enabling Law Enforcement Agencies to analyse and visualise different forms of data from various sources in order to combat cross border crimes and organisations, detect and disrupt respective illicit money flows and cybercrime.

“There will be an increase in the need for digital transformation. Organisations have been steadily moving from manual KYC processes to more automated systems with integrated workflow capabilities. Digital onboarding and ID verification is key and as the world starts witnessing the benefits of such automated solutions making remote KYC identification verification faster, easier and secure, digital transformation is sure to emerge as an essential tool for seamless cross-border financial services.”

Ciantar – as well as Bailey – believes the importance of perpetual KYC will become more prominent. He stated that constantly having updated data on subjects is ‘of utmost importance and ensures you are totally compliant with regulatory requirements are up-to-date at all times. He concluded, “Data procured from external sources and integrated with your KYC system will offer the opportunity to collate, assess and corroborate the digital footprint of existing and potential customers in real time, creating a 360 degree view.

Growth and standards

Going into the new year, many RegTech companies will be looking towards what comes of the pandemic – and what new challenges will arise from any newly-imposed restrictions. Kunal Grover – head of business development for Zeidler Group – believes there is still much to be achieved by the industry.

He stated, “I believe that the demand for Regtech services will continue to grow in 2022 as there is still a lot of room for the industry to grow further. The increased demand is due to various factors including the impact of Covid-19, the desire of asset management firms to streamline their legal and compliance processes, cost savings and efficiencies and increased regulatory demands, Additionally, I believe legal and compliance executives at asset management firms have realised that they need to strongly consider moving to technology solutions to better manage their day-to-day tasks.”

Grover mentioned the trends for the new year he sees are as a result of the ongoing regulatory obligations on asset managers in areas such as SFDR reporting, EETs and PRIIPS KID amongst others. He remarked that he expects more asset managers wanting to outsource the creation of bespoke software solutions instead of buying off the shelf solutions from service providers.

He concluded, “Lastly, I would say that we may find that with remote work likely to last in some shape or form, asset management firms are looking to further invest in technology solutions to promote productivity and collaboration.”

In addition – Ashim Banerjee – CEO of IDMission – minimum performance standards will become a new norm for regulators going forward. He remarked, “Regtech today comprises a series of technology components that are required for financial service providers to remain compliant. We expect regulators will go beyond just specifying technologies and also demand minimum performance standards. In the case of AI driven technologies these will probably be represented by published minimum standards for Accuracy, Precision and Recall.”

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