How regtech will help in enhancing emerging Asia's financial markets

REGULATORY technology (regtech) may have found a new global node in Singapore, given its growth in the city-state's financial services sector. International developments have driven its emergence, as the proliferation of fintech solutions and technologies see regulatory mandates evolve.

Traditionally perceived as a sub-sector of financial technology (fintech), regtech involves functions such as regulatory reporting, risk management, identity management and control, compliance, transaction monitoring, as well as data management in financial institutions (FIs).

But the growth of fintech startups - often not as capitalised or leveraged as traditional FIs - with their new financial instruments and business models heightens regulatory complexity and risk. New technologies that involve high-speed machine trading also render financial transactions and activities harder to track and regulate.

Regtech developments promise to enhance the regulatory landscape by providing emerging markets with technologically advanced solutions for the growing demands of risk management and compliance within and beyond the financial industry.

According to a research paper, Fintech Innovations: Perspectives from Singapore and London, by ICAEW and the Institute of Singapore Chartered Accountants (ISCA), Singapore, like London, offers five key elements - markets, talent, capital, progressive regulation and strong government support - which synergise to drive fintech development.

This is unlike the United States, where different elements are split across New York (established financial sector), Silicon Valley (technology talent and capital) and Washington DC (regulatory oversight). In the case of Germany - Europe's largest economy - Berlin remains a technology hub while financial services are concentrated in Frankfurt.

Both the United Kingdom and Singapore host regulators which are highly supportive of innovation and growth in financial services. Moreover, in terms of market access and capital, Singapore and London are hosts to large investor pools and home to mature financial services sectors.

These provide strong foundations for further fintech and regtech development, given the presence of established markets for new products and services. However, recent developments around Brexit may see Singapore surpass London in the near future.

MARKET OPPORTUNITY

Regtechs' global market size is expected to grow from US$4.3 billion in 2018 to US$12.3 billion by 2023, at a compound annual growth rate (CAGR) of 23.5 per cent. This is driven by the increased costs of compliance, adoption of regulatory sandbox approach, and low entry barriers for Software-as-a-Service (SaaS)-based offerings. Meanwhile, a more optimistic report by Grand View Research predicts that the global regtech market will reach US$55.28 billion by 2025, expanding at a CAGR of 52.8 per cent for the 2019-2025 period.

The increasing need for risk and compliance management has driven growing adoption of regtech solutions. These solutions reduce compliance costs, enhance efficiency and, more importantly, increase profit margins. Regtech also serves to process the growing data volumes being produced, as well as accelerating business processes and reducing friction for customers and the risk of compliance failures.

Currently, regtech adoption is greatest in Europe, owing to strict and mandatory rules and directives for financial transactions and data protection. The regulatory harmony required by the European Union's common market also drives this adoption.

For instance, cloud deployment mode offers large financial enterprises the chance to opt for SaaS on a subscription basis as per usage, rather than incurring costs on hardware and infrastructure for more traditional solutions.

Regulatory intelligence is also expected to grow the most in coming years, owing to the much-needed functionality of identifying and interpreting regulatory changes. This enables FIs and other financial service players to navigate a fluid regulatory environment and minimise the risk of non-compliance. Additionally, such analytics provide FIs with the insights necessary to inform better regulatory management and reporting.

Large enterprises are expected to hold the largest market share in the near term as they are compelled to adopt regulatory programmes. With rules and regulations fluctuating across industries and regions, regtech solutions that can track and enable efficient management of business functions will grow in demand.

GOVERNMENTAL REGTECH USE

Regulators in major financial markets have been exploring regtechs' potential. For instance, the Australian Securities and Investments Commission (ASIC) has established a dedicated regtech team, introducing new software to augment its regulatory policies.

This highlights the growing application of regtech to financial regulatory policy. However, technology alone cannot resolve all regulatory problems. The domain expertise of human risk management and compliance professionals remains crucial, and this is central to meaningful and effective regulation.

Since 2016, the Monetary Authority of Singapore (MAS) has been proactive in employing fintech to streamline and enhance its regulatory capacity. A recent development is the launch of an accelerated scheme in August 2019, the Sandbox Express, for accelerated market testing of innovative financial products and services. Applicants can commence market testing within 21 days of applying to MAS.

By comparison, many fintech vendors take a longer time as they have to customise their products under the existing FinTech Regulatory Sandbox. While regulatory sandboxes cannot eliminate all risks - failure is inherent in innovation - it helps minimise the fallout from failed projects.

MAS has also driven the merger of money exchange and remittance systems law into unified legislation, enabling comprehensive regulation of old and new payments services. Such legislation is often a significant obstacle in other jurisdictions looking to boost regulatory rigour, and this simplification of regulations is benefiting the global regtech landscape.

Singapore's regulator has also expanded its global reach through pacts with the French regulators Autorite de Controle Prudentiel et de Resolution (ACPR) and the Autorite des Marches Financiers (AMF), and the Swiss Financial Market Supervisory Authority (FINMA).

Given the stable financial infrastructure base, its status as a legal services hub and committed financial regulator, Singapore has many of the elements to become a global leader in regtech. Last year, the MAS-backed Asean Financial Innovation Network (AFIN) launched the APIX platform that promises to matchmake FIs with fintech ventures and accelerate collaboration and partnership formation regionally. And in the context of volatile geopolitics - the US-China trade war and Hong Kong's political turmoil - Singapore offers the best business continuity and stability in Asia.

CORPORATE REGTECH USE

Beyond its governmental use, regtech enables the deployment of agile and scalable solutions for corporations. It has a role in reducing the friction and costs of being compliant with increasingly stringent and constantly fluctuating regulations across jurisdictions.

Such technologies are vital, especially in Asia, following misconduct centred on the Malaysian state fund 1MDB scandal. This stemmed from irregular compliance practices and illustrated to global players how tracking massive volumes of transactions across numerous banks and national borders is a formidable task, with fraudulent activity able to slip through loopholes.

Such loopholes are not unique to Asia. In September 2019, Amsterdam-based ABN AMRO came under investigation by Dutch authorities for allegedly failing to comply with stringent regulatory AML/KYC requirements involving due diligence and monitoring of customer transactions and behaviour.

It became the latest European bank to be penalised with punitive fines and reputational damage. Ironically, this isn't the first time the bank has been investigated. Following the allegations, ABN Amro announced its annual compliance costs would increase to 140 million euros (S$211 million) this year, an increase of 40 per cent over 2018. To reduce such costs, relevant regtech solutions might be the answer.

Such incidences, as well as the different regulatory regimes and cultural practices, influence how fraud or money laundering is detected. Such incidents highlight the potential for Asian regtech solutions in Asia, which can enhance trust in financial systems.

Automated solutions are less biased and resistant to human error, usually offer great efficiency and lower costs and can maintain greater safety and security than traditional regulatory methods. When high-quality solutions have a proven track record of working across multiple use cases in European or North American deployments, it makes sense to implement and test them in Singapore, and subsequently adapt them for Asia.

While Asia has some way to go in regtech adoption, the rapid development of emerging Asian markets and financial systems means regtech has significant potential to enhance the quality of financial systems. As Asian economies mature, so too will the technology and compliance standards of its financial markets.