The RegTech trends to watch out for in 2023


Since the onset of the Covid-19, the RegTech sector has witnessed a period of growth, with further growth expected going forward. What can be expected to happen in 2023?

With the restrictions brought about by the pandemic, many companies were forced to move to digital models in order to maintain their businesses. This offered a huge opportunity for RegTechs, with 2021 proving to be red-letter year for the sector and 2022 highlighting key long-term growth trends.

However, with the world now all but risen from its Covid-19 slumber, new challenges and roadblocks could be about to appear for the RegTech sector.

Mike Castiglione, director of regulatory affairs, digital assets at Eventus, believes four key trends could inflict themselves on the industry this year.

He remarked, “Inflation, an economic slowdown, and spectacular examples of financial fraud and poor risk management are shaping RegTech in 2023.”

According to Castiglione, the top two trends the company is seeing a re-examination of compliance software’s true cost and a realisation that investors will now conduct deeper due diligence about how well a firm is implementing compliance best practices.

“Firms always look at the cost of software services,” said Castiglione. “The next level of sophistication is to also look more closely at the cost to operate, namely whether a given RegTech solution truly will free up compliance staff for higher-level tasks and whether the software can scale, adapt, and get implemented efficiently.”

In addition, he believes that more people are realising that selecting the right software helps improve staff retention and compliance. Doing this can help save money to use across other business lines.

Going into 2023, venture capital firms and other investors and promising more due diligence claims the Eventus director of regulatory affairs. Furthermore, these firms are going to ask more about a company’s compliance systems before committing funds.

He continued, “We already knew that RegTech was essential to enter new jurisdictions and new markets, for licensing, and to meet regulatory requirements. Now RegTech is going to be used earlier in a start-up’s growth journey, probably as part of an assessment of product-market fit.”

Another major trend for 2023, Castiglione believes, is emboldened enforcement. “This means the stakes are higher, that companies need views across all asset classes, and that clients are demanding RegTech be transparent and help them master their company data.”

In addition, global regulators are seeking more resources and latitude to pursue enforcement actions. He cited the fact that in the US last year, there was a higher incidence of insider dealing cases and fines for crypto promoters.

He concluded, “In 2022, we certainly learned that “crypto” and “tradfi” were no longer separate and those able to navigate a multi-asset class world will be firms with a holistic view.

“Compliance teams will expect RegTech to handle crypto along with other assets, and not have to switch across numerous systems. We’re looking for growth opportunities for trade surveillance to combat market manipulation and for transaction monitoring to identify risk, two high-demand areas especially for digital assets.”

The year of AMLA?

In the opinion of Moody’s Analytics industry practice lead Nicola Passariello, the AML agenda for 2023 in Europe is likely to be dominated by the creation and, more significantly, by the powers of the EU’s anti-money laundering authority (AMLA).

At the moment, the plan is for it to be constituted in 2023, funded in 2024, operational by 2025 and effective by 2026.

Passariello remarked, “We have spoken to regulators and practitioners, and our sentiment is that in Europe we need to close loopholes and enforcement gaps around anti-money laundering. In America, they have OFAC as the main enforcement agency, but there is no equivalent in the EU. Policy is decided at EU level, but enforcement and application is sovereign, and countries go their own way, which creates asymmetry, inconsistency, and flaws in the system.”

How will such gaps be closed in the European market? The Moody’s industry practice lead highlighted that the proposal is for that to be within the auspices of the AMLA. However, the remit outlined in the initial documentation which said the AMLA would be able to monitor implementation and application of AML practices across the EU has been removed.

Now enforcement will happen at a national level and each member state will be responsible. The AMLA will have discretionary powers and will exchange information with national authorities, but they will not oversee implementation of asset freezes, for example, which essentially means the real power of AMLA could be diminished.

“What the AMLA is likely to do is have a remit to monitor the 40 biggest obliged institutions in the EU, the ones most exposed to risk of money laundering and counter terrorist financing to preserve the integrity of the unions financial system,” said Passariello.

“The AMLA will have supervision over these 40 entities who need to show their risk policies and how they use and implement risk and compliance tools, this includes looking at crypto asset providers within their business network, by drafting specific regulatory technical standards.”

The AMLA will also coordinate and support the exchange of information between financial intelligence units to tackle the transnational nature of organised crime.

Passariello quipped, “While the AMLA is likely to have the power to fine any one of the 40 obliged entities if there are compliance failings, as it stands, they won’t monitor the implementation of asset freezes. Instead, the focus will be to ensure group-wide compliance, to work on strategies, and processes to ensure they are adequate for managing risk. The AMLA will not have wider enforcement powers outside these institutions.”

The crypto power balance

Meanwhile, Moody’s financial crime compliance industry practice lead Hugo Veazey believes that the trojan horse of compliance management in 2023 will be crypto.

He explained, “Everybody is talking about it, but does anyone really know what’s inside and what will fall out of its belly once brought inside their gates? If you ask a traditional bank, the MLRO is still not likely know the true scope and nature of the crypto assets in their network and who is behind them, how it works and what the vulnerabilities are.”

Elsewhere, Flagright growth manager Damilola Joseph Ibitola believes there is an ongoing power balance in the crypto sector, a balance that could be driven by considerable ambivalence regarding regulation.

He detailed, “Europe knew it needed a directive on crypto regulation, so new regulation has been drawn up to protect investors and the risk of them losing money through not understanding how crypto works. But with understanding vague and knowledge lacking, it is an opportunity for money laundering and terrorist financing.

“In the world of crypto, the criminals are ahead. Practitioners and regulators need to catch up, and they need technology providers on their team. In the crypto market right now, it’s a case of organized crime versus disorganized compliance, and that power balance needs to shift in 2023.”

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