Monitoring financial innovation, fostering knowledge‐sharing and technological neutrality in regulatory and supervisory approaches are among the focus points of the EBA. Part of the mandate of the EBA aims to contribute to establishing a common European approach towards technological innovation. This has become even more important since the use of innovative technology in the financial sector continues at a fast pace. In its latest paper the EBA provides a view on the current RegTech landscape and on the benefits and challenges of using Regulatory technology. The paper concludes with a set of proposals on how to further facilitate the scale-up of RegTech in the EU.
Benefits and challenges
Financial institutions can gain significant benefits from opening up to new technologies and using RegTech solutions. The benefits are improved risk management processes, better monitoring and sampling capabilities, reduced human error, increased efficiency, and quick adaptation to regulatory changes.
However if not correctly implemented, there are also associated risks and challenges with the use of new Regulatory technology solutions. From the financial institutions’ (FI) perspective, the data‐related obstacles, including data availability, data quality, data standards, and data privacy and protection play a prominent role in the RegTech adoption process. Other internal factors such as a lack of FIs’ API capabilities, costly and often lengthy and complex due diligence processes also create barriers to the adoption of RegTech. To ensure the integration of these solutions with existing systems, FI’s should ensure that RegTech solutions are properly integrated into their internal infrastructure and systems.
On top of the internal barriers to FI’s or RegTech players themselves, the regulatory framework can also create barriers to innovation and adoption of RegTech. A lack of regulatory standards for technical requirements and data related standards or a lack of harmonisation of legal and regulatory requirements across the Member States of the EU could currently creating barriers for wider market adoption of RegTech solutions across the Single Market.
Adoption of RegTech by FIs
There are many things to consider by financial institutions before a RegTech solution can be adopted. To determine the most appropriate deployment model, one of the main decisions is to decide between ‘build’ versus ‘buy’ models. The statistics used by the EBA show that among FIs, on‐premise implementations of the RegTech solutions approach is the most prevalent: 55% of FIs have their (on‐premise) RegTech solutions. Next, 41% are deployed in a SaaS model, and 15% in a RaaS. However, on‐premise implementation is the dominating deployment model in the area of prudential reporting (83%) and Creditworthiness Assessment (CWA) (70%). Fraud preventions and AML/CFT RegTech solutions are predominantly deployed as SaaS or RaaS solutions – respectively 53% and 50% of such solutions are deployed as SaaS models. Furthermore, 24% of the AML/CTF solutions are deployed as RaaS models by FIs.
The time between the decision to opt for a new RegTech solution and bring it into production is a crucial criterion when it comes to the selection of a particular RegTech provider. The average time in months, as indicated by RegTech providers, from the start of a proof‐of‐concept until going live into production for two‐thirds of all solutions is less than three months. It takes less than six months for almost 90% of solutions. Based on the sample data, prudential reporting solutions seem to take the shortest implementation time, with 82% of the solutions able to be used in less than three months. Technical integration may be based on a few (not mutually exclusive) approaches. On the FIs’ side, RegTech solutions are mainly integrated via real‐time interfaces (48%). Batch interfaces (36%) and manual interfaces (31%) are also frequently used. The RegTech solutions provided by RegTech providers are also primarily integrated via real‐time interfaces (62%). The second most common approach is data‐driven integration (48%), followed by batch interfaces (46%).
Other important factors in RegTech adoption include due diligences and risk assessments, establishing an internal RegTech sponsor and ensuring that the RegTech solutions are properly embedded in the organisation’s systems and processes.
Why banks should opt for RegTech /Main benefits
The main benefits and advantages of using RegTech solutions over traditional solutions differs when looking either from the FIs’ or RegTech providers’ perspective.
Interestingly, for both FIs and RegTech providers, the cost pressure and cost reduction are seen lower down on their list of key benefits.
Focus on prudential Reporting
The RegTech solutions for prudential reporting have a wide scope of applicability which covers different steps along the reporting process chain. Most of these solutions add automation to reporting processes. However, the degree of automation varies heavily throughout the different parts of the reporting process chain.
The data collected from Regulatory Technology providers shows that most of the RegTech services provided are focused on the first steps of the reporting process, namely understanding the regulatory data requirements, data validation and data reconciliation.
Regarding the technologies used by RegTech providers, Data transfer protocols are the most commonly utilised (included in 62% solutions). Also, cloud computing claimed to be used by 54% of RegTech solutions providers. Other technologies, such as machine learning, predictive data analytics, natural language processing (NLP) seem to play a minor role for reporting solutions (included in 30% of solutions). However, not all of the RegTech solutions enable interoperability with other systems or applications and this is another field to tackle in the future.
The EBA Cost of Compliance study (CoC) gathered evidence on the nature and complexity of the IT solutions used for regulatory compliance and associated reporting obligations. The objective of this study was to identify how FI’s perform regulatory reporting on top of their regulatory compliance, and to understand the general setup of the IT solutions used along the four different phases of the regulatory data chain:
- understanding regulation
- extracting data from the sources
- data calculation and reconciliation
- reporting and monitoring processes
For small and medium‐sized institutions the use of in-house solutions and Commercial‐off‐the‐shelf software (COTS software) is negligible and almost all the steps of the process are covered by service providers’ solutions. The proportion of in-house solutions is, as expected, more present for larger institutions. In any case, the predominant use of service providers or in-house solutions highlight the level of tailoring required in prudential reporting solutions.
‘Ongoing regulatory change’ and the need for ‘regulatory data integration’ seem to be the most important drivers in the scope of prudential reporting. In terms of challenges, the EBA rightfully points out the lack of standardisation. Although some progress have been made with the DPM models, other initiatives such as BIRD and IReF may provide more harmonization across the EU in the future. Nevertheless, the level of standardisation and integration remains a key barrier to the upscaling of RegTech players in the field of prudential reporting. The EBA has covered the various proposals and ways forward on an integrated reporting framework in their recent launch of a consultation on integrated reporting.
In conclusion, the EBA, by building on the existing initiatives, proposes several steps to be taken to support the adoption and scale‐up of RegTech solutions:
- Improve knowledge and address any skill gaps among regulators and supervisors on RegTech.
- Take further steps to harmonise the legal and regulatory requirements where needed.
- Further leverage the role and expertise of the European Forum for Innovation Facilitators (EFIF) and the national regulatory sandboxes and innovation hubs.