Luxembourg: From Fiction To Reality To Necessity: Regtech's World Takeover

It was about two years ago that articles about regtech first began hitting newsstands. The financial world had been undergoing huge waves of new laws for about a decade, complex regulations usually accompanied by high penalties for non-compliance. The idea of these regulations was, generally, to make sure supervisory authorities had accurate documentation with which to ensure a safer marketplace for everyone, but companies faced practical drawbacks immediately: traditional tools simply could not keep up with new reporting demands, and so the overall costs of compliance were rising dramatically.

Thus, the scene was ideal for regulatory technology—regtech—to emerge. And when it did, interest was immediate and expectations were huge. That's because regtech proposed to use new technologies to automate as many of these compliance tasks as possible, from analyzing data to compiling, verifying, and submitting reports. It also promised, on a deeper level, to help organizations change their relationship with data, bringing compliance-oriented approaches into day-to-day strategy and management processes.

All of this is exciting—but what is the status of regtech now, in 2019?

Real use and really useful

As regtech matures, we can see its advantages more broadly. While spanning a wide range of technologies, angles, and specializations, regtech products mostly promise the same things: efficiency (in terms of easier management and time savings), cost reduction, risk anticipation, security, and better reactivity. Instead of combing through circulars and regulations to see which ones apply to a new system, tools now exist to search and recommend that information (my colleagues have recently been working on technology that does just this for the EU's DAC 6 regulation / MDR). Or, complex reports can be generated and sent to authorities with a single click, with the assurance that they comply with both older regulations and new directives.

Put another way, regtech is beginning to really meet the promises made in articles from a couple of years ago. And companies have felt the difference, in terms of freeing up their human workforces to focus more on value-adding tasks rather than on menial checks.

Proliferation

When the first fintech subsectors began to emerge—think of regtech, insurtech, robo-advisors, and so on—each one seemed like a niche product for a niche market. As more startups, investments, developments, and technologies have broadened the scene, however, this is no longer the case. The appeal is broad, and regtech is especially prominent: at the recent Fintech Awards Luxembourg, eight of the semi-finalists (or 40% of them) classified themselves as regtechs, and several of the other entrants use regulatory tech components in their products.

In Luxembourg, where many companies have back-office operations, regulatory compliance is a particularly important issue. Thanks to this demand, together with the burgeoning startup scene and stores of big financial players, the country has become a regtech leader (just last year, three Luxembourgish regtechs were ranked in the top 100 worldwide by RegTech Analyist).

Beyond fintech

Part of what sticks about regtech is also that, despite its being commonly lumped in with fintech, it has applications in plenty of others sectors too. As Bert Boermans, CEO of Luxembourgish regtech Governance.com, points out in an interview with the LHoFT: "Regulation is not limited to the financial sector. Look at healthcare, airlines and even any exchange listed company. They are all subject to their own rules and regulations." Regtech is not a just a tool for banks—it's a smart, technological approach to compliance that is helping redefine how the back-end of a company operates at all.

The regtech future...

...is bright. Very bright. The Fintech Times reports that investment in regtech grew by nearly five times from 2014–2018, with almost USD 4.5 billion invested last year alone. To distill the future back into a concrete example, take one of the runner-ups of this year's Fintech Awards: Uniken. The regtech platform, based in the USA, allows companies to engage with customers securely. Essentially, it promises to enable its clients to uncover new transaction channels including voice, text, chat, email—in a compliant, safe, transparent way.

Here, we can already see that regtech is not totally confined to the financial industry. We can also see an emphasis on security and transparency, which is in line with regulatory aims, without any detraction from the strong focus on customer experience too. It is exemplary of what's happening across the field: technology is maturing and being used to do more—more for clients, regulators, and users, all at the same time.

It took a long time for regulatory compliance to become exciting, but we are finally there.

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