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RegTech – The Big New Frontier

FinTech in financial sector given rise to a range of new business models, applications, processes and products providing financial services by making use of software and modern technology. Therefore, RegTech (Regulatory Technology) is the term getting very popular in FinTech industry means to use technologies facilitate regulatory compliance. RegTech aims to prevent being fined for not complying to a certain local and international law.

RegTech Universe

 It’s not far from where the governments had to impose certain regulations to keep everything under the local and foreign law. Noncompliance results in huge fines and sanctions. When it started to happen regularly, it was decided that companies needed a separate compliance department.

Development of RegTech led through numerous events. “The credit crisis of 2008 and the heavy level of financial services regulation that followed created a perfect vacuum of innovation in banks,” wrote Falguni Desai in Forbes. “Following the credit crisis, banks have been slapped with several new regulations and dealt heavy fines and penalties for non-compliance.” Because of this, banks have been forced to “pay more attention to their back offices and spend more on compliance and risk management programs than ever before.”

Thereby, more banks and financial institutions started focusing on their back offices and investing in risk management and compliance programs. Banks have 10–15% of their staff dedicated to compliance on average (globally). According to a study conducted and published in the Cost of Compliance 2018 Report, regulatory divergence costs financial institutions 5-10% of their turnover annually. This makes the senior management to use a significant amount of its time in tackling it, time that would have otherwise been used to identify emerging risks in the financial system. This leads to a downside in international growth.

RegTech is the answer to a real need.  Learning, interpreting and complying with voluminous regulation requires the financial services industry to spend great resources.  And RegTech has the promise of making that process more efficient and cost-effective.

How RegTech is Addressing Regulatory Issues for Financial Institutions

  • PSD2, MiFID II, Basel III, GDPR, Solvency II, AIFMD, MAR, SFTR
  • KYC, AML, CDD, Fraud, Financial crime, Conduct compliance
  • Onboarding, Identity Verification, Cyber security, Risk Management
  • Dealing with the challenges of regulatory change

RegTech Solution

The main technologiesthat support RegTech Solutions includeCloud Computing, Block chain, Application Program Interface, Machine Learning, Big Data, Data Mining & Analytics, LMS/e-Learning, Predictive analysis, Smart Contracts, Visualization Solutions and much more.

 Benefits of Adapting RegTech Solutions

  • The RegTech solutions will enable financial institutions to have smooth compliance when reporting to the regulators. Also, transparent and proactive risk and compliance reporting will improve governance and make the process swift.
  • The company will also have better customer experience and be more confident in the process. It is also cost-effective using the RegTech LMS that will educate both the employees and relevant stakeholders.
  • Due to simplified and standardized compliance processes, there are reduced costs. This is through automated mapping of regulatory risks that reduce the need for manual and duplicate checks.
  • RegTech solutions also help to protect the financial health of institutions and prevent disruption of the market agility and integrity.
  • Utilization of sustainable and scalable solutions allows flexibility and business growth. This helps enterprises to scale up from rigid enterprise risk management systems.
  • It also assists firms to identify risks and issues proactively through scenario analytics and horizon scanning for new regulations.
  • RegTech also allows controls and risk frameworks to be linked seamlessly with the enterprise governance and risk control platforms.

 

Why is AML important in FinTech?

 As per recent research, regulatory fines have exceeded US $ 320billion since 2008. The cost of compliance has also increased and is still scaling up.

Cost of AML Non-Compliance

 According to a recent Forbes article, some banks spend up to US$500 million each year in an effort to improve and manage their Know-Your-Customer (KYC) and Anti- Money Laundering (AML) processes. The average bank spends around US$48 million per year. In the US alone, banks are spending more than US$25 billion a year on AML compliance.

Huge fines for Deutsche Bank for money laundering offences

02.02.2017 | Anti-money laundering, Compliance

In January 2017, Deutsche Bank received fines amounting to about £506m for failure to prevent money laundering. The UK’s Financial Conduct Authority (FCA) imposed its largest ever fine of £163m on the Bank, with the New York Department of Financial Services (DFS) imposing a fine of US$425m.

FCA fines Standard Chartered Bank £102.2 million for poor AML controls | Published: 09/04/2019

The Financial Conduct Authority (FCA) has fined Standard Chartered Bank (Standard Chartered) £102,163,200 for Anti-Money Laundering (AML) breaches in two higher risk areas of its business. This is the second largest financial penalty for AML controls failings ever imposed by the FCA.

Norway FSA fines Santander bank $1 million for anti-money laundering breach | 04 Jul 2019

Norway’s Financial Supervisory Authority has ordered Spanish bank Santander (SAN.MC) to pay a fine of nine million crowns ($1 million) for violations of the country’s anti-money laundering laws, it said on Tuesday.

Context in Bangladesh

 The Money Laundering Prevention Act was enacted in 2002 to battle the issues of money laundering.The Bangladesh Financial Intelligence Unit (BFIU) is an independent unit of Bangladesh Bank established under section 24 of MLPA, 2012, while it has established in 2002 as the name of Anti Money Laundering Department. BFIU acts as a lead agency for the implementation of MLPA, 2012 and financing of terrorism related sections of ATA, 2009. It monitors the degree of compliance done by the various reporting organizations to prevent money laundering and terrorist financing.

 

It is also important for the financial organizations to setup a compliance department and Anti-money laundering Department (AMLD).  The regulations necessitated for all banks and financial institutions to train their employees on AML and CFT. However, a major concern is the cost of classroom training that is quite expensive for some.  However, PMaspire Singapore Pte. Ltd, a global RegTech Solutions decided to provide an online course on Anti-Money Laundering(AML) and Combat AgainstFinancialTerrorism (CFT) to help comply with domestic and global regulations and security threats.

RegTech LMS – AML e-learning course

This e-learning course was designed as per the Bangladesh Bank AML guideline. It has a special feature that allows company personnel to view and export employee’s learning matrix with certification records.

This exclusive RegTech AML e-Learning course covers:

  • Money laundering and Terrorist Financing which entails an overview of money laundering, the link between money laundering and terrorist financing, viable reasons forcommitting to money laundering and terrorist financing, stages of money laundering, and how to combat money laundering and much more.
  • Regulatory Framework that entails  Bangladesh Financial Intelligence Unit (BFIU), Supervision Framework, Reporting and Record-Keeping, Penalties, Punishment and much more
  • Compliance structure that entails Compliance Structure, Central Compliance Unit (CCU), Anti-Money Laundering Department (AMLD), Chief Anti-Money Laundering Compliance Officer (CAMLCO), Branch Anti-Money Laundering Compliance Officer (BAMLCO), Internal control & Compliance Department (ICCD), External Audit and much more
  • Risk Management Strategies that include Customer Due Diligence or CDD, Know your customer (KYC), and Transaction Profiling
  • Trade-Based Money Laundering that includesan overview of Trade-Based Money Laundering, Tools and Techniques of TBML, How TBML can be prevented and much more.

Why AML Online Training will save 90% Cost Over Classroom Training

PMaspire online Anti-money laundering and Combat againstFinancialTerrorism training will save almost 90% of the cost incurs in classroom training. The system has a learning tracker and an individualized user login page in which anyone can learn the concepts at any time. It also has a section-wise assessment test, case studies and certification exams that enhance the learning environment.

 

This is effective for banks and financial institutions who won’t have to spend on the classroom training that is normally carried out during their working hours and traveling which leads to more cost for the organization.

Figure: 2

RegTech Ecosphere

 The regulatory technology is vast and requires strong government support, policy-making and a good knowledge base of the stakeholders. The various stakeholders include the central banks, bank policy-makers, customers, employees, shareholders, government authorities and FinTech solutions providers.

This ecosystem may work through the following initiations:

  • Regulators will open dialogue and gather market views in order to promote innovation and create common integrated standards.
  • RegTech firms will develop solutions to meet the needs of businesses and local regulations.
  • Professional services firms will be responsible for “driving cohesion of regulatory standards, institution needs and vendor solutions” as well as connecting providers and users.
  • Financial institutions will adopt and RegTech Software Companies will develop RegTech solutions.

When these parties work together, the will be able to drive innovation within the RegTech industry, develop advanced data analytics capabilities, and reduce the cost of compliance in financial services. For RegTech to be successful now and into the future, it must be fully supported by governments and regulators all over the world.

According to a study by Deloitte, RegTech solutions work best in information-based obligations and risk identification and management tools. These include legislation and gap analysis regulation tools, compliance, health checks, management information, transaction reporting, regulatory reporting, activity monitoring, training, case management, and risk data warehouses.

RegTech has a great role in our technology-driven era and we can greatly benefit from it. This is greatly helping to solve most risks and challenges that exist in the financial industry. Early adopters will be a step ahead and will easily gain insight for a competitive edge.

Abdulla Al Mamun is the CEO of PMaspire and he can be reached at abdullapmp@gmail.com

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