Last year, like many of us, I binge-watched TV series to beat the lockdown blues. In my favourite and the most popular of them all, The Money Heist, the Professor, the ethical protagonist with unquestionable moral values, justifies his crime of minting money for himself and his team because governments all over the globe do the same to bail out big financial institutions and save the connected economy from crisis. Though the series brings up various moral dilemmas, this underlying premise around which the whole story was woven was left undebated. The series’ popularity suggests, in any country, the public holds the same view.
The toughening regulations and public panic
After the 2008 financial crisis, the public was angry against governments for deeming the large financial institutions non-guilty or too big to be judged guilty, even when their actions clearly caused an economic slowdown and impacted the whole globalized world.
This view affected not just the economy but also the next elections in the countries most affected. To reduce public discontent, they toughened financial regulations that review financial decisions of firms and keep their risks within acceptable limits.
The toughening regulations have two problems. Small companies that focus their resources on innovation cannot spend them on having a regulatory compliance team to help them make decisions that abide by the complex financial laws. Bad financial decisions may cost them heavy reparations. This makes businesses risk-averse, suppresses innovation, and is bad for the economy.
The other problem is, many judge regulatory non-compliance to be fraudulent even when it is only a poor business judgement. This would affect share prices and can threaten the very existence of the firm in question.
The new Social Dilemma
It is not only financial institutions that need regulation. Though technology helped us swim through 2020, the Pandemic year, we are now more aware of the negative impact of BigTech.
Tech gadgets and apps have been stalking us for years. Most believe that corporates in this capitalist world put profits above people, an opinion popularized paradoxically by various social media pages and movies like ‘The Social Dilemma’.
So, we think it is the government’s duty to regulate corporate firms. The recent global outrage against the new security policy of WhatsApp proves the need for better regulation and increasing digital security awareness.
The Problem of Regulations
It is impossible to manually regulate digital technologies.How do governments update their systems to regulate businesses? How do they assess their regulations if they are enough to check fraud but not too tight to suppress economic growth?
How do they regulate financial institutions in the fast-evolving, volatile, and connected business ecosystem, not only to gain public trust but also for the greater common good of the businesses, their stakeholders, and the economy?
The volatile business ecosystem demands frequently changing regulations. How can corporates and their compliance teams abide by the changing laws effectively and calculate essential risks that they may have to take?
RegTech as self-adapting digital solutions for FinTech and Beyond
RegTech was conceptualized as a branch of FinTech, to digitize regulations applicable to financial institutions. Governments apply RegTech digital solutions to monitor financial institutions and gather timely reports of non-compliance and risk assessment. RegTech applications are also used by businesses to monitor themselves, verify legal compliance, and avoid legal tussles. These applications check and assess risks and help them choose profitable options.
Though RegTech is popular as GRC (Governance, risk management, and compliance) digital solutions, it is growing beyond FinTech with wide applications. Some of these solutions are being used to regulate technologies. Many digital products have become essential to us.
During the lockdown, we shopped digitally, paid bills using digital wallets, celebrated events virtually, learnt from many webinars. Most of these changes will stay beyond the pandemic scare and these new habits will force many regulatory changes.
Regulatory bodies are mostly understaffed and underfunded. They are trying hard to make sense of the continuously evolving and complex financial ecosystem and regulatory frameworks. Sophisticated, adaptable, and reliable auto-regulatory frameworks built on novel technologies like AI, Blockchain, BigData can take the load and break the complexity. Machine learning models learn, predict, and evolve to meet FinTech advancements as well as regulatory changes.
Compliable laws should closely follow market realities.
We cannot apply laws made for non-digital markets to digital ones. RegTech solutions algorithmize existing laws and check for relevance. However, it is not easy to transfer principles to algorithms. This brings new problems such as, how to assess intent with an algorithm?
How to determine if a company made a bad financial decision to make profits at the cost of breaking a law or hurting the economy? How to differentiate a bad financial decision from intentional fraud?
It may sound impossible, but we are slowly heading towards such complicated RegTech solutions powered by robotic systems built on AI, ML, BigData, Natural Language Processing, Blockchain and other latest technologies. Sceptics may call technology untrustworthy.
Yes, there will be challenges, and humans will have to manually intervene to resolve issues. Despite the issues that technology might bring us, experts agree that RegTech is the most effective solution to digitize regulations in line with the changes in human communications and transactions in our society.
RegTech for the new digitized society
Digitization is expanding our regulatory frameworks to new needs of the society, new business collaborations in new contexts, and new rules and regulations. Many governments have been trying various RegTech solutions to analyze data produced by big financial institutions to make more efficient and appropriate regulations.
The success of these pilot projects gave many businesses the needed confidence to invest in RegTech innovations and the sector has been attracting huge investments.
RegTech Businesses are expected to grow quite fast in this decade. The industry news of new collaborations between software and compliance regulation firms we hear every now and then proves the point.
A start-up approached coMakeIT for an end-to-end RegTech solution, a customizable, domain-agnostic, cloud-native GRC solution. We put together an agile product team to provide the start-up a full suite of product engineering services ranging from architecture, technology choice, UX design, development, CI/CD/CT, and DevOps.
The detailed roadmap we defined, and the MVP we quickly developed assured them of market validation. This helped the start-up fulfil its ambitious goal without worrying about setting up a technology and engineering team.
These collaborations advance the use of analytical software solutions in regulatory monitoring, compliance, and risk-assessment and broaden RegTech to new domains. Many GRC firms now have dedicated cybersecurity and technology risk assessing teams.
It is interesting to note that this is all happening when more traditional non-software firms are slowly adopting digitalization and are being run as software companies.
It is not easy.
With so much data travelling through our web applications, and so many changes happening in the ecosystem, risk assessment and regulatory compliance are extremely difficult.
RegTech solutions eliminate human errors and assess risk with advanced and perpetually evolving models. They are auto authenticated with reliable systems like Blockchain, the technology underlying digital currencies like BitCoin, and hence safer than non-digital frameworks.
The essential RegTech
RegTech solutions are indispensable to solve changing regulatory problems in a digital ecosystem. They solve from both ends. It provides regulators with sophisticated technical methods that auto-supervise and check financial frauds and encourages companies to assess risks and innovate.
RegTech makes regulations and compliance easy and reliable and thus prevents companies from making bad financial decisions. It saves small start-ups time and huge losses due to reparations for security frauds. It fosters innovation, reduces risk, forges new collaborations while automating various trading compliances.
With new vistas opening in RegTech, the sector is growing fast to meet the needs of our digital society. These new advancements give us the hope that RegTech can shape our new digital connected society into a more just one.