Regtech accounts for more than 30% percent of fintech companies in Luxembourg. Photo: Shutterstock

Regtech accounts for more than 30% percent of fintech companies in Luxembourg. Photo: Shutterstock

Regtech and AI machine learning can help banks make significant savings on their compliance systems, but legacy thinking is proving to be a hurdle for some organisations.

It’s not just legacy systems, but ‘legacy thinking’, that is holding back some organisations from adopting regtech solutions and technologies such as AI machine learning that can offer banks large cost savings, according to Nicole Sandler, head of digital policy at Barclays.

Speaking at the Focus on Regtech event hosted by Luxembourg for Finance on 19 April, Sandler said that while compliance is vital to the success of any firm, many firms aren’t investing sufficiently in regtech because compliance isn’t thought of as a revenue generating function.

Sandler said legacy systems initially proved to be an obstacle for many old firms looking to invest in regtech, but that many fintechs now offer solutions adapted to different firm systems.

She stressed there were significant costs that come with non-compliance, such as regulatory fines, reputational risk and advisory fees. “A lot of large institutions have been around for a long time, and it takes time to change people's mindsets. All of these solutions bear the cost that comes with them and many firms have numerous other costs. So, you have to make sure your senior executives are supporting investing in these in these solutions,” she said.

Regtech uses technologies like cloud, open data models and artificial intelligence to enhance the regulatory process to meet ongoing compliance requirements. Following the financial crisis in 2008, when a wave of financial regulation was introduced, many firms were forced to implement stronger compliance and transparency requirements at a significant cost. Regtech has played a pivotal role in facilitating compliance needs and risk management with innovative cost-effective solutions.

Positive outlook for investment in regtech

Oscar Farres, head of venture capital and digital economy at the European Investment Fund, also in attendance at the event, said he was optimistic about the regtech investment landscape in Europe this year, despite a sharp decline in investment during the first quarter. “I am confident that investment volumes will pick up again for a number of reasons. It has probably never been a better time in the last three years to invest in European tech,” he said.

Farres said European venture capital as an asset class had a strong track record and less competitive deals would lead to lower valuations. “Hopefully as these companies mature and are ready to exit the market, we will again see an upcycle with higher valuations,” he added.

Luxembourg has established itself as a hub for Regtech in recent years. According to Luxembourg for Finance, regtech accounts for more than 30% percent of fintech companies in Luxembourg.