RegTech disconnect between vendors and FIs

On 29 June 2021, the EBA released a new report (EBA Analysis of RegTech in the EU Financial Sector) presenting its analysis of the RegTech in the financial sector. The report presents a number of conclusions that include the need to address knowledge gaps on RegTech amongst regulators, support the harmonization of supervisory treatment and regulations relating to RegTech, and continued encouragement of regulatory sandboxes.

The report has good news for RegTech providers with satisfaction levels for solutions high and IT spend by FIs on the rise for their solutions (increasing at 75% of respondents, remaining stable with 19%, and decreasing at only 6% of respondents).

Presenting results from the perspective of both financial institutions (FIs) and also RegTech providers, the report highlights differences in experiences. It is these differences that are the most interesting and lead to the following observations.

1. RegTechs need to be more sophisticated with product messaging

It is clear from the report that FI requirements and expectation for RegTech has matured. They want to see technology benefits from enhanced risk management, better monitoring and sampling capabilities, and reduced human error. This contrasts with dated messaging from RegTech providers that quote benefits as efficiency and effectiveness and responding to regulatory change.

2. RegTechs need to align offerings to market need

The report highlights the misalignment between where FIs are using RegTech solutions, where they have experience of those solutions, and the proportion of offerings from providers. This shows that AML/ CFT, ICT Security, and Credit Worthiness Assessment are underserved and could present opportunities for RegTech providers.

The large classification of many RegTech providers in the “Other” category (and based on a review of the listing of these categories from the report annex) suggests the need for better market alignment by them. This is especially true as RegTech providers highlight the lack of FI understanding of RegTech solutions as a barrier to entry.

Every RegTech provider will claim the uniqueness of their solutions, but if these solutions don’t meet the expectations of the market place they will be difficult to position and sell and highly unlikely to be successful.

3. Greatest competitor for RegTechs may be internal builds

The overall satisfaction levels for RegTech solutions are high but FIs only just prefer external RegTech solutions (75% overall satisfaction) to those built in-house (70%).

Good news for RegTech based cloud offerings, as Software‐as‐a‐Service (SaaS) solutions had the highest satisfaction level of 83%.

4. Regulation is not the real barrier for RegTechs

90% of RegTech providers consider that the lack of regulatory/supervisory guidance and support as an obstacle to their solutions across different countries. This same view is not held by FIs.

5. RegTechs need to be realistic on deployment times

The report highlights a discrepancy between deployment time expectations. 66% of RegTechs claim deployment times of less than 3 months but the report suggests a 12-18 month deployment cycle is experienced for the majority of solutions by FIs. Although such extended project periods may be due to a lack of technical readiness on behalf of the FIs, RegTech providers should do a better job of setting expectations.

If you’ve found this analysis interesting. Please reach out and I would be very happy to discuss the state of the RegTech market with you.

EBA consults on a new central AML/CFT Database

On 6 May the EBA published details of a consultation on the creation of “Regulatory Technical Standards (RTS) on a central database on anti-money laundering and countering the financing of terrorism (AML/CFT) in the EU”.

The EBA has faced significant criticism in the wake of supervisory issues that emerged from events at Danske Bank. At the start of last year, it announced a new legal mandate that establishes it in a new role to lead, coordinate and monitor the financial sector’s fight against money laundering and terrorist financing across the EU. They published a factsheet on the strategy and approach.

Taken from EBA – Anti-Money Laundering and Countering the Financing of Terrorism, Feb 2020

The new consultation is part of work to create a key tool as part of the new EBA strategy. To establish and keep up-to-date a central database with information on AML/CFT weaknesses that competent authorities (CAs) across the EU have identified in respect of individual financial institutions.

Information sharing, either public or private, relating to financial crime is always a good thing but the focus here seems to be misdirected and could lead to further pressure on banks and FIs without the desired effect of risk reduction. As such the priority seems to be an attempt at fixing the supervisory failings, without turning the spotlight on the supervisors themselves, when it should really be focussed on improving the financial crime compliance outcomes.

It is obvious that competent authorities across the EU, and FIUs globally, should do more to coordinate their efforts to combat financial crime and that information sharing is a key enabler to do this. It is also clear that the assessment of institutions plays a significant role in ensuring safety and soundness – we are only as strong as the weakest link. But, if the technical specifications described in the consultation paper are anything to go by, this new database will just create a further stick to beat the banks with rather than real risk reduction.