What do Chief Compliance Officers think about RegTech?

Senior compliance officers are taking the lead in assessing their organizations’ RegTech needs and identifying prospective solution providers.

If you are new to RegTech you might think this is an obvious state of affairs given that the compliance function will be most impacted by any technology relating to regulatory processes. However, compliance professionals are actually quite a varied group: some will run for the hills claiming it’s nothing to do with them if you mention the word ‘technology’; others want to be in the driving seat to ensure that technology solutions address their main challenges.

At RegTech Analyst (a division of FinTech Global) we’ve noticed a significant shift over the last couple of years in terms of the increasing involvement and leadership roles taken by senior compliance officers in an area that is clearly mission-critical for their organizations.

The latest edition of the Global RegTech Review, which provides an in-depth analysis of the global RegTech market, also includes an insightful survey of fifty senior compliance officers from a range of Tier-1 and Tier-2 financial institutions.

The survey reveals invaluable insights about the compliance officers’ perspective. Here are three of them.

Compliance Officers are actively engaging with the RegTech market and looking to transform the compliance function

RegTech solution providers now need to focus more explicitly on the needs of compliance function leaders.

Until recently, most RegTech companies centred their attention on the technology and innovation departments, but the centre-of-gravity for the decision-making process is shifting towards the compliance department.

According to survey respondents:

• 80% indicated they have been in talks with one or more RegTech solution providers over the last couple of years, or are looking to work with one over the next year;
• 36% are already seeing the benefits of implementing a RegTech solution;
• 16% are currently in talks with one or more RegTech providers; and
• 53% expect to increase the amount of time they spend looking at RegTech suppliers over the next year.

Given the appetite exists and the door appears to be open, who should RegTech providers be approaching? In 38% of cases the leader for investigating RegTech is the CCO, followed by the CTO (16%), the CRO (13%) and the Head of Innovation (11%).

Compliance officers are most actively looking to RegTech providers to address compliance monitoring, new legislation and costs.

The three areas most often cited as requiring RegTech solutions are: compliance monitoring; dealing with new legislation; and compliance costs.

This is in direct accordance with the three most pressing issues that compliance officers say they face: the ever-increasing instances and ever-rising financial penalties imposed by regulators due to compliance violations; the increasingly complex and burdensome regulations being issued; and the cost of having to employ more staff to deal with both of these challenges.

Other areas of concern include KYC, risk management and cyber security. In these areas it appears the RegTech market is well-aligned with buyers’ interests as 26% of companies offer solutions to address compliance management and 17% offer onboarding verification products (including KYC). It’s worth noting that ‘cybersecurity and data protection’ is not higher up on the list, considering the high-profile cases of security breaches in the last few years. This can be explained by the fact that in larger organisations cyber security more often tends be the responsibility of the Chief Information Security Officer or the CTO.

Licensing agreements are the preferred way of collaboration between financial institutions and RegTech companies.

According to participants in the survey, the most popular model for working with RegTech suppliers is via licensing agreements, whereby software can be relatively easily installed for an agreed period – and easily uninstalled to facilitate easy switching to another supplier, if a more attractive solution becomes available.

Partnering with RegTech companies is the second preferred option. This form of collaboration allows the compliance teams to work alongside RegTech companies and support the development of a solution to address the particular issues faced by the financial institution. It’s a mutually beneficial arrangement whereby the incumbent organization solves its specific problem while the technology provider generates a client, as well as a case study of their product illustrating how it delivers value.

Standard ‘client relationships’, come third. These are primarily service agreements that include more than software licensing, e.g. data management and compliance monitoring, and typically involve a more engaged relationship than straight-forward licensing agreements.

At first glance it may seem strange to see that ‘investment’ doesn’t rank higher considering the number of FinTech-focused corporate venture funds in the market. However, the authority to execute investments into third-party companies is usually held by decision-makers outside of the compliance department. In addition, issues relating to independence, conflicts of interest and client confidentiality (where competing financial institutions might be able to invest in the same RegTech company) were cited by compliance officers as key concerns for this category of collaboration.

RegTech companies need to do much more to convey their value propositions.

As the cost of inadequate compliance is very high - and potentially catastrophic - it is somewhat of a shock to see ‘price’ appear as the top reason for compliance officers to reject RegTech solutions. The second most common reason is an ‘unclear value proposition’ which implies that ‘price’ is likely to be a proxy for (a perceived lack of) value.

Hence it is clear that many RegTech companies struggle to convey the advantages of their offerings in a market that should have a relatively high price ceiling. Any valid RegTech solution should be offering financial benefits (directly or indirectly) that are a multiple of costs.

Integration appears to be the other major hurdle for RegTech adoption. Third-party products are often deemed too cumbersome to implement with legacy systems, or else regarded as not offering an adequate end-to-end solution.

For many RegTech market participants there appears to be a disconnect between buyers and sellers. The demand certainly exists and there are lots of RegTech solution providers in the market that offer innovative, high ROI products and services (represented at their best by the list of RegTech100 companies, which are profiled in the Global RegTech Review 2019). Hence the message is getting lost somewhere.

It seems that RegTech providers may need to redirect or amplify their messages to the compliance department of prospective clients and to ensure those messages articulate more clearly the cost/benefit impact of their solutions.

Further information

If you would like to connect face-to-face with 1,000 senior professionals who are creating and shaping the RegTech industry, please join us at the largest RegTech event of 2019: the Global RegTech Summit and partner events in London on 14 – 16 May, 2019.

For more details about the Compliance Officer Survey, including responses to questions about responsibilities, budgets and sales cycles, or to get profiles on each RegTech 100 company, please review the Global RegTech Review 2019.

To review the list of RegTech 100 companies, please visit the RegTech100 website.

For ongoing coverage of the global RegTech market, including news, research, industry developments, investments, partnerships and profiles of over 1,000 RegTech companies, please visit the RegTech Analyst website.