In this regard, regulatory technology, better known as ‘RegTech’, becomes particularly pertinent. In brief, RegTech refers to the technology which helps companies deal with their regulatory processes, including compliance matters.
The main objective of RegTech can be said to enhance and make more efficient the compliance process. It operates on a three-pronged objective aimed at:
- decreasing compliance costs whilst increasing efficiency;
- improving compliance and lessen risks; and
- ensuring customer protection.
As one of the main actors of the international business community, especially on the question of compliance, law firms are in our view directly concerned with RegTech. We here examine the possibilities and challenges which RegTech offer to law firms.
RegTech and law firms – Challenges and Opportunities
In our view, RegTech would be a natural choice for law firms involved in cross-border transactions because:
(a) “technology now plays an increasingly fundamental role in financial services and is also a catalyst for change and innovation” (Fintech: Law and Regulation, Jelena Madir, Elgar Financial Law and Practice);
(b) it focuses on agility, speed, increased integration and analytics (BBVA Research, RegTech, the New Magic Word in FinTech (2016); and
(c) the FenTech applications identified by the Financial Conduct Authority of the United Kingdom actually (i) support regulatory compliance in firms (ii) improve regulatory oversight and modernise regulators and (iii) reform regulatory systems and could be considered as a starting point.
The RegTech solutions identified by the Toronto Centre (FinTech Regtech and SupTec: What They Mean for Financial Supervision (2017)) are FinTech opportunities and relevant to law firms namely:
Digitalise client on-boarding processes, share customer information, gather and analyse customer and transaction data, identify suspicious transactions based on automated triggers and constantly update customer profiles;
(i) enable enterprises identify and changes in regulatory requirements locally and globally and
(ii) automate real-time monitoring of compliance levels and risks based on data analysis;
Improve risk management process of financial institutions;
Automate and integrate regulatory reporting requirements thereby
(i) reducing costs
(ii) streamlining and increasing accuracy and reporting timelines;
Offer real-time transaction monitoring and auditing by using DLT, end-to-end integrity validation, anti-fraud and market abuse identification systems; and
trading in financial markets
Automate procedures related to transactions in financial markets.
The foreseeable challenges to the implementation of RegTech as a novel approach to enhancing efficiency would in our view be the following:
(i) onerous procurement processes;
(ii) preference for large and established providers;
(iii) fragmented market;
(iv) regulatory uncertainty;
(v) concentration risk;
(vi) data protection security and cyber threats (Fintech: Law and Regulation, Jelena Madir, Elgar Financial Law and Practice at 266-268).
Of these four indicators, the main barriers are the question of onerous procurement processes and a known preference for large and established providers. First, lengthy approval processes, on-boarding cycle and decision making of financial institutions hinder RegTech adoption. Secondly, increased interconnectivity will lead to new risks regarding data protection, privacy and cyber threats. Therefore, increased collaboration between financial regulators and FinTech enterprises are to be encouraged to address these concerns.
The increased reliance on digital applications of the global village since the start of the COVID-19 era has called for a corresponding need to put into place a more robust legal framework to address issues triggered by technology. Opportunity knocks on the doors of the actors of the international business community to review the existing regulatory processes especially for compliance and adapt to the challenges of the digital world. Law firms are no exception.