“Regtech” to Transform Regulatory Compliance

The “Regtech” sector is transforming regulatory compliance and risk management by using new technology to automate and streamline previously costly processes.

The current regulatory environment in many Canadian industries features increasingly complex regimes that produce substantial compliance costs for industry participants. In many larger organizations, this has necessitated entire departments dedicated to ensuring compliance. Regulation also creates substantial barriers to entry for many start-ups attempting to disrupt traditional practices in these industries. Non-compliance can result in further costs through penalties and fines.

These circumstances have created incentives to automate and streamline as much of the compliance function as possible. Companies want to find ways to comply without investing heavily in additional personnel and want to do so in a repeatable and failsafe manner through a technological process.

“Regtech” is this intersection between new technology and regulatory compliance. It encompasses the growing number of recent technologies that have capitalized on our hyper-regulated environment to apply cognitive computing, data analysis, a seamless user experience, and other fintech principles to regulatory requirements in order to simplify, streamline, and automate the process. Regtech has already begun reducing overhead for larger firms and reducing barriers to entry for market entrants, including fintech firms competing in the traditionally heavily regulated and big-player centric financial services market.

Regtech firms have begun to reduce costs in risk management, reporting, finance, audit, and other areas. For example, several regtech firms are working to streamline and automate Know Your Customer, anti-money laundering, and suspicious transaction reporting requirements, in order to limit the level of human input required to only where absolutely necessary. By on-boarding clients electronically, actively monitoring customer bases to ensure compliance with regulatory and internal requirements, and providing data-driven alerts for anti-money laundering and suspicious transactions, certain functions of regtech are likely to become both faster and more accurate than manual compliance procedures in the near future.

These innovations are also being applied to technologies that help businesses manage risk. By applying cognitive computing to the analysis of large amounts of data, regtech seeks to limit human error and reduce the time needed to analyze risks such as credit, lending, fraud, and finance. Regtech is understandably disruptive to many traditional organizations and practices that manage risk but also presents a substantial opportunity to produce more competitive organizations.

Several government initiatives also appear amenable to creating an incubation environment for regtech technologies. One such example is the regulatory sandbox launched by the Canadian Securities Administrators (“CSA”) in 2017, which gives regtech firms the opportunity to submit their business model for review by the CSA for an opportunity to be tested throughout the Canadian market. In addition, the Ontario Securities Commission’s (“OSC”) recent “RegTech hackathon” brought together 120 members of the FinTech community in 2016 to find solutions to capital market regulatory issues. The OSC has stated that based on the results from this event, it will explore ways to take a more innovative and flexible approach to regulation.