Regulation technology could support SME growth, but barriers remain

Regulation technology could support SME growth, but barriers remain

Technologies that help companies comply with regulation, known as RegTech, could transform sectors with wide-ranging solutions from sustainability reporting to anti-financial crime, according to the latest TechNation report. The RegTech Association said the technologies will also open vital opportunities for SMEs to boost efficiency, collaboration and transparency.

Over the last few years, regulators have imposed a vast array of new rules on financial firms, large and small - for example, requiring them to measure risk more precisely, monitor employee misconduct, vet clients more closely, and file data-intensive disclosures.

According to risk intelligence firm Corlytics, March 2020 saw 1,300 regulatory changes and rule updates worldwide. This ever-changing landscape creates a complex barrage of requirements that is difficult and costly to comply with, especially for smaller firms with limited resources. To keep up, firms are increasingly investing in technology that helps ease the burden.

Common RegTech uses include consumer protection, anti-financial crime, capital measurement, and tax and financial reporting. The technology can help by, for example, digitising customer information, increasing data security, automating reporting, or using artificial intelligence to increase accuracy of incident alerts.

Philip Treleaven, professor of computer science at University College London, said: “Financial companies are overregulated. It is costing them billions in compliance and it’s unsustainable.

“But plenty of great technology is available to help them take out a huge part of that cost. An example is federated learning to support anti-financial crime in cryptoassets. That allows companies to collaborate privately without sharing data - one thing they need to tackle financial crime effectively.”

Leica Ison, non-executive director at the RegTech Association, said RegTech may particularly benefit SMEs where:

  • regulatory environments are particularly complex to navigate and monitor
  • scope exists to improve risk-based regulatory approaches
  • technology can enable better monitoring, including by overcoming constraints related to physical presence
  • technology can safely unlock more data uses for compliance.

Adoption struggles

Despite this need, there is still a significant lack of adoption for RegTech among financial firms, including SMEs.

2021 research from the City of London said around 50% of RegTech vendors viewed adoption by financial institutions as moderate, and a third said it was low. In the same year, Financial Conduct Authority research blamed low adoption on lack of interoperability and integration with complex legacy systems at incumbent firms. Both bodies called for more action in the RegTech space to overcome these challenges.

Early adopters are making progress in automating processes to cut compliance costs, said Ison. However, much more needs to be done to capitalise on the opportunities. This is partly to do with the technology, and partly awareness and culture barriers, she said.

She agreed interoperability and integration are obstacles to adoption as businesses have many old systems not designed to integrate, especially with outbound data exchange to third-party systems.  However, capability in these areas is changing significantly, which will help SME adoption.

For example, innovative RegTechs can help address this through flexibility in mapping core data systems; and integrating data streams into existing systems.

“Complex data protocols can be mapped in weeks, not months, making it cost-effective for SMEs,” she added. “’No code’ apps and software-as-a-service is also helping, allowing SMEs to set up in hours, not months.”

Identify the problem first

Eva Micheler, associate professor at London School of Economics, said: “Whether SMEs should embrace RegTech depends on their situation. For example, a small insurance firm needs to keep up to date with regulations in their sector. They can use a service that sends them the relevant information - then share it with the appropriate people. If you're a small organisation, maybe that is best done at your weekly staff meeting.

“However, if you are a medium-sized financial call centre with many workers in disparate places, technology that rewrites your scripts when regulation gets updated could be useful.”

Micheler agreed the complex web of legacy systems makes it harder to integrate new solutions.

“Even well-funded entities operate on several computer silos,” she said. “But maybe an SME would find it easier because they're digital-first and more agile.”

But don’t make the mistake of buying the technology, then looking for problems it can solve.

“There are lots of keen RegTech start-ups with products to sell,” said Micheler. “But always start by asking what problem you want to solve. Would adopting RegTech make it cheaper, compared to the current method, and over what timeframe?”

Deborah Young of the Regtech Association added that 95% of RegTech companies are founded by experienced ex-practitioners who have lived the challenges and created applications fit to solve them.

“However, compliance is deeply complex and sometimes challenging to achieve quickly or without strategic alignment,” she said. “Those adopting RegTech must involve all parts of their business including, risk, compliance, legal, IT security, and procurement.”

Organisations like the Regtech Association can then help find best-fit solutions by, for example, running global proposal requests.