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[FinTech101] What is RegTech 3.0? How to reinforce the regulation process with AI?

Updated: Dec 18, 2023


In today's rapidly evolving regulatory landscape, staying compliant is more crucial than ever for businesses and financial institutions. With the power of RegTech (Regulatory Technology), organizations can streamline their compliance processes, mitigate risks, and enhance overall regulatory efficiency. Let us dig down into the industry practice here to unveil the latest trend for you.


1.     What is RegTech? What is RegTech 3.0?

Regulatory technology (#RegTech), a subset of fintech, is the use of technologies to enhance the efficiency and/or effectiveness of risk management and regulatory compliance. Some scholars also stated that RegTech could be understood as a collaborative effort on Compliance Technology (CompTech) and Supervision Technology (SupTech), while the former one be seen as the responsibility of banks or other service providers, the latter one refers to the responsibility of the regulator.

You may think that RegTech is nothing new, which you are actually correct. Regarding to research, RegTech adoption could be chased all the way back to 1967, as RegTech 1.0. Global financial regulation has historically been reactive, evolving primarily in response to crises. For example, the first Basel Accord was the result of financial deregulation in the 1970s and the ensuing Developing Country Debt Crisis of 1982. You may also understand it as the beginning of KYC (Know Your Customers). [1]

Moving to RegTech 2.0, it has emerged in response to the increasingly heavy post-GFC global financial regulations. Post-crisis regulatory reforms, including AML (anti–money laundering) and KYC requirements, have transformed the operations of financial institutions—reducing their risk taking, profitability, and scope of operations. At this stage, the way we do KYC turns into a more scientific and technological way, some practitioners consider it as KYD (Know Your Data)[2].

Today, with a wider adaptation on credit scoring with AI and big data, some scholars also see it as RegTech 3.0, which involve a regulatory approach that is as datacentric as the markets it monitors.




2.     Why is it important to adopt RegTech?

RegTech has been a topic of extensive discussion within the regulatory technology domain since 2008. Post-2008 waves of complex, prescriptive, and lengthy regulation have drastically increased the cost of compliance and have been accompanied by steep increases in regulatory penalties. RegTech has the potential to bring massive benefits to all key-players in the market.


1) Benefits to banks and compliance related industry:

RegTech is cost saving. RegTech, if implemented correctly, can help businesses with a more consistent approach to data quality, from the onboarding stage to the ongoing customer monitoring It enables banks to achieve higher quality risk management and compliance outcomes. It helps free up staff from repetitive manual tasks for more value-adding work. The use of Cloud-based RegTech technology, for example, gives banks the flexibility to adapt to changes in regulation and risk management, while maintaining superb quality in risk management and compliance activities. [3]


2) Benefits to customers:

RegTech helps improve customer experience. While respecting customer needs, eliminating duplication, offering the most suitable products and, most importantly, keeping customers protected. The use cases discussed in those sessions showed that RegTech offers exciting opportunities that go beyond a compliance tick-box exercise and greatly improve customer experience and satisfaction.


3) Benefits to regulators:

While recognizing the importance of RegTech, the HKMA has always been managing the risks associated with the digital economy. RegTech can play a critical role in helping banks to maintain operational resilience, and that in turn makes it easier for regulators to better manage overall risk in the financial system. 

3.     What is current trend on RegTech adaptation in Hong Kong?

The RegTech industry is rapidly maturing and witnessing significant advancements as it continues to evolve.


To further promote wider use of Regtech, the Hong Kong Monetary Authority (HKMA) developed a two-year roadmap to promote Regtech adoption in the Hong Kong banking sector, namely "Transforming Risk Management and Compliance: Harnessing the Power of Regtech" in 2020. Besides, the HKMA also launched the first Anti-Money Laundering (AML) RegTech Lab (AMLab) to further encourage the use of RegTech under the “Fintech 2025” strategy.[4] It aimed at strengthen banks’ capabilities to protect customers from fraud and financial crime losses, reduce risk displacement across the banking sector and raise the overall effectiveness of the AML ecosystem.


Thanks to the support from HKMA, FundingReach was selected as the first RegTech company featured by HKMA as RegTech use case and broadcasted on its webpage and social media. Click here to explore further on our solution:  HKMA - Regtech Use Case Video - Citibank and iFinHealth Corporate loan risk management solution



4.     How to adopt AI on RegTech in compliance process?

In this area AI and machine learning is starting to play a significant role driven by the sheer volume of data that needs to be assessed as well as the non-conventional nature of this data. While much of the role of AI and machine learning in RegTech relates to topics already discussed in prior sections, the key advantage of machine learning in a pure RegTech sense is the ability for continuous monitoring of firm activities.

There are different RegTech approaches and solutions in the market that have been proposed to support regulators and market participants. Talking about from the field of fraud detection, to various studies address the detection of bank fraud, insurance fraud, and other related financial fraud. For instance, financial statements, insurance claims and credit card transaction data have been analyzed to identify fraudulent events. Additionally, several studies address the identification of suspicious situations in financial markets. In another stream of research, automated approaches have been proposed for summarizing legal documents.

For example, in FundingReach, we provide services with AI automation from fraud detection to compliance screening. One of our AI solutions – iFinGate, has already been supported by over 300 million sources of data profile and more than 50,000 data sources, our engine helps filter the data with machine learning, providing an almost real-time update and on-going monitoring progress.



5     What are the potential issues while adopting RegTech in AI?

Despite RegTech’s meteoric expansion, the industry is not left without its challenges. Listed below are the three main challenges many firms face when undertaking new RegTech efforts:

1) Inconsistency on regulatory:

Navigating the complex and evolving regulatory landscape can be challenging due to inconsistent regulations at both national and international levels. RegTech offers a solution to overcome these challenges, but it is crucial to choose the best solution that ensures reliable data sourcing and covers both quantitative and qualitative aspects of compliance.

2) Concerns on cybersecurity:

With increased reliance on the internet and information technology, cybersecurity has become a significant concern. Inadequate security measures can leave companies vulnerable to data breaches and cybercrimes with potentially devastating consequences. To mitigate these risks, companies must prioritize strong cybersecurity measures and select secure and reliable RegTech solutions.

3) Limitations in legacy system:

Resistance to change and concerns about return on investment and technology longevity can hinder the adoption of Regtech. Companies that cling to legacy systems may face difficulties integrating with new technologies or require extensive modifications. Additionally, the migration of historical data to new platforms and providing adequate training to employees are essential steps in successfully transitioning to Regtech.[5]




6.     How to cope with challenges on RegTech in 2023?

While there are significant benefits RegTech offers, the adoption of Regtech today still presents challenges that organizations must overcome. Somehow we know technology helps, yet it takes some key factors to reach the way to success. Here are some tips for you to win the game of Regtech adaptation.

1. Obtaining buy-in from a range of stakeholders within financial institutions is crucial

This includes not only leadership but also middle management and operational staff. A supportive culture and collaboration across the organization are necessary for a successful RegTech-led transformation.


2. Data plays a central role in RegTech

Quality data is essential for building effective models and generating valuable insights. Building trust with customers is vital to acquire high-quality data, which must be stored and transformed according to robust data governance rules. Identifying relevant data and using it intelligently and responsibly is crucial for effective RegTech utilization.

3. Proper risk management is of utmost importance

Legacy infrastructure in banks can pose challenges to RegTech adoption. Starting small, such as conducting a Proof of Concept (PoC) or implementing RegTech in a Cloud-based environment, can be a practical approach. However, it is essential for banks to have a robust risk assessment framework to evaluate and manage the associated risks. Data security and third-party operational risks should be carefully considered, and the sandbox can provide a valuable testing ground for new RegTech solutions.


4. Collaboration among different stakeholders in the ecosystem is critical

RegTech solution providers, technology firms, and advisory firms possess valuable knowledge and experience in supporting RegTech implementations. These external partners can help bridge any technical gaps and provide expertise, enabling banks to focus on their core value propositions and competitive edge.


We may see that embracing RegTech is like assembling a puzzle where obtaining buy-in, leveraging quality data, implementing proper risk management, and fostering collaboration. With all these essential pieces, once connected, you may unlock the full picture of adopting AI automated regulatory compliance. Other than that, it also improves operational efficiency and positions organizations for future success in an increasingly digitized and regulated environment.


To conclude, RegTech is undoubtedly revolutionizing the way business navigate complex regulatory environments. By leveraging advanced technologies such as artificial intelligence (AI), RegTech offers a transformative solution for improving accuracy and efficiency in compliance process, from navigating the regulatory complexities, reduce risk, and gain a competitive edge. To know more about how to get the best solution that fit your business model on applying RegTech with AI in the compliance process, CONTACT US NOW to get a free demo.

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[1] Arner, D. W., Barberis, J. N., & Buckley, R. P. (2017). Fintech and Regtech in a nutshell, and the future in a Sandbox. SSRN Electronic Journal.

[2] Ghosh, A. (2022, December 5). Regtech: From KYC to Kyd to ... Kydl. Medium. 

[3] Hong Kong Monetary Authority. (2021a, June 29). Closing remarks at the HKMA’s.

[4] Hong Kong Monetary Authority. (2021, November 4). HKMA launches AML Regtech Lab.

[5] Teichmann, F., Boticiu, S., & Sergi, B. S. (2023). Regtech – potential benefits and challenges for businesses. Technology in Society, 72, 102150.

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