Despite a decline in the number of regtech deals, total investment was on pace at mid-year to exceed 2019 investment. As jurisdictions around the world continue to evolve regulations related to financial services, such as privacy rules and open banking regimes, regtech is only expected to become more important.
Given the challenges associated with COVID-19, financial services companies globally are facing increasing pressure to reduce costs. At the same time, many are embracing digital business models and digital solutions in order to service their customers remotely — solutions that present new risks that companies must manage. This is driving increasing interest in regtech as financial institutions look to enhance their ability to manage regulatory compliance without increasing the structural costs.
Digital transformation is still one of the main drivers of regtech. We see a lot of regtechs dedicated to helping financial institutions keep track of new regulations and their potential impact. KYC, customer protection and data security are also driving the advancement of regtech.
The Markets in Financial Instruments Directive II (MiFID II), the Fundamental Review of the Trading Book (FRTB), various regulations related to the protection of personal data, the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) and other regulations have reshaped and will continue to reshape the regulatory and compliance environment in financial services. Individual jurisdictions have also introduced requirements for fintechs, such as Singapore’s new Payment Services Act. As requirements continue to evolve, both in terms of requirements and complexity, regtech is expected to become more important, particularly for companies operating on a global scale that need to be compliant across jurisdictions.
Regulators in a number of jurisdictions are driving interest and investment in regtech as a means to improve compliance among their regulated entities. For example, the US Commodities Futures Trading Commission (CFTC) established LabCFTC as a mechanism to support innovation and improve the quality and competitiveness of regtech and broader solutions. In the UAE, the Financial Services Regulatory Authority of the Abu Dhabi Global Market (ADGM) is conducting several regtech pilot projects, including the use of bots for dealing with license applications and trialing of API-enabled regulatory monitoring1.
In Europe, there will likely be increasing opportunities and demand for regtechs that can help companies manage the transition between UK and EU financial regulations, and respond more readily to changing regulations in both jurisdictions post-Brexit. Corporates are expected to become more interested in regtech moving forward, particularly in areas like KYC, customer protection and data security.