To vastly oversimply, regtech companies help financial firms comply with a long list of national, European and international rules.
Asset managers, auditors, banks, brokers, insurers and service providers need to comply, because the cost of not complying is getting steep. The amount of individual fines is often ten times larger than four or so years ago, one industry executive told Delano.
So far this year, the CSSF, Luxembourg’s main financial regulator has issued regulatory fines of €246,230, €100,000, €80,000 and €30,000 (PDFs) against several firms. (It also levied fines of €10,000, €7,500, €5,000, €3,000, €2,000 and €1,750.)
New York State’s Department of Financial Services, one of the main Wall Street regulators, recently fined Deutsche Bank $205,000,000, Goldman Sachs $54,750,000 and Western Union $60,000,000 (PDFs).
That can start to add up. So financial firms are increasing investment in compliance tools to avoid such penalties. That means regtech outfits are addressing real and present needs for financial firms, the industry executive said.
Compliance spending
A survey by Duff & Phelps, a consultancy, found that 11% of financial firms spent more than 5% of annual revenues on compliance in the past year; 22% said they would allocate that much by 2023.
According to KPMG’s “The Pulse of Fintech 2018” report, published in July:
“Over the past 10 years, financial institutions have faced an ever-increasing regulatory burden. The cost of compliance has skyrocketed for many financial institutions, particularly global institutions needing to comply with regulatory requirements across jurisdictions. The growing cost of compliance has driven many corporates to invest in regtech. The introduction of financial regulations including GDPR, PSD2 and Markets in Financial Instruments Directive II/Markets in Financial Instruments Regulation (MiFID II/MIFIR) have only accelerated this investment over the past 6 months.”
And existing rules constantly evolve. Thomson Reuters said in its “Cost of Compliance 2018” survey, published in June, that last year it “captured 56,321 regulatory alerts from more than 900 regulatory bodies worldwide, averaging 216 updates a day. This compares with an average of 201 alerts for the previous year”.
Counterintuitively, its survey of senior compliance staff at large financial institutions found they are spending less time keeping abreast of changes: only 6% spent “more than 10 hours a week tracking and analysing regulatory developments” in 2018, down from 12% in 2016 and 24% in 2014. Thomson Reuters reckoned part of the decline may be due to “the wider use of technology”.