Over the last decade, regulatory and compliance requirements have increased for all financial companies. At the same time, countries are introducing new legislation and regulatory requirements. Dealing with these evolving and ever-changing compliance expectations can be a costly ordeal.
According to a report by Deloitte, operating costs spent on compliance has increased by more than 60% for retail and corporate banks compared to pre-financial crisis levels. Another report points out that compliance costs in the ASEAN region have risen by 9%-10% in 2020 alone.
Additionally, policymakers, regulators and shareholders now expect firms to not only comply with emerging regulations but also ensure that existing systems are effective and efficient. This increasing cost burden along with slow revenue growth has impacted the returns of financial entities.
Therefore, firms are increasingly looking at regtech, short for regulatory technology, to meet evolving regulatory expectations, reduce cost burden and increase efficiency. According to a recent study, regtech solutions that focus on customer lifecycle management can help financial institutions reduce customer onboarding time, a historically challenging issue, and cost by approximately 70%.
It comes as no surprise that a recent FIS study found that the majority of financial firms in Hong Kong are aiming to invest heavily in regtech solutions over the next 12 months. Apart from the cost considerations, regtech adoption in Hong Kong is being driven by massive support from the government.
The Hong Kong Monetary Authority (HKMA) published a two-year road map to promote regtech adoption in 2020. Last month, it released a Regtech Adoption Practice Guide for cloud-based regtech solutions. The HKMA is also contemplating the formulation of a regtech skills framework and the creation of a regtech knowledge hub in the coming months.
According to the Regtech Adoption Index 2020 published by HKMA, regtech adoption in Hong Kong is still in its early stages. There are ample opportunities for growth and improvement in regtech adoption, the report notes. The report found that 80% of banks believe regtech adoption enhances quality and control. And 70% of banks believe regtech helps reduce cost and increases efficiency. Additionally, 30% of banks feel that regtech attracts and retains customers, and helps drive financial inclusion while 37% believe it enhances their innovation capabilities.
More importantly, the report notes that firms are increasingly adopting regtech to not just meet compliance needs, but also to combat financial crimes and manage risks.
We look at three different models of regtech adoption delineated by a KPMG report and assess their differences and their potential advantages and drawbacks.
The Authoritarian Model
Authoritarian Model of Regtech Adoption. Source: KPMG
In this model, the head office decides the regtech solutions and strategy to be deployed across the entire organisation. According to the KPMG report, this model of regtech adoption is in widespread use among global financial companies.
The authoritarian model of regtech adoption has distinct advantages. For instance, since all branches of a financial organisation spread across countries use the same technology, there is uniformity and interoperability of regtech solutions. Moreover, deploying one solution across the company can bring down the cost burden of introducing new technology.
However, the drawbacks of this model far outweigh its perceived benefits. The KPMG report noted that the extensive use of this model is one of the key reasons for the relative lag of regtech deployment across Asia-Pacific (APAC). This is because regulatory requirements are starkly different across jurisdictions and require a more adaptable and customised approach.
Therefore, the one-size-fits-all strategy for regtech deployment can leave companies ill-equipped to meet different and evolving compliance requirements.
The Autonomous Model
Autonomous Model of Regtech Adoption. Source: KPMG
In the autonomous model of regtech deployment, firms provide more autonomy to individual offices to lead their own regtech initiatives. This strategy is especially used when the branches are located in markets with the biggest opportunities. This model is growing in usage amid multinational firms, according to the KPMG report.
Unlike the authoritarian model, the autonomous model of regtech adoption provides more flexibility to firms to meet country-specific regulatory requirements. Therefore, it offers them a competitive edge over other players who struggle to adapt to the varied compliance needs.
However, this model requires the allocation of separate budgets to individual offices which can drive up the overall investment. But the flexibility and adaptability offered by the model help firms meet current as well as future regulatory and compliance requirements with ease. This can result in considerable savings in the long run.
The Capability Model
Capability Model of Regtech Adoption. Source: KPMG
This model allows offices with better technology capabilities to develop their own regtech solutions. These solutions are then scaled up and deployed across other markets.
While this model allows offices the autonomy to come up with their own solutions, only the best initiative is deployed uniformly across the organisation. This may allow firms to create healthy competition and foster innovation as each office tries to come up with the best solution. However, like the authoritarian model, this approach can leave firms less flexible to meet varied regulatory requirements across markets.
It is important to mention that regtech adoption is still in its nascent stages and companies across the globe are trying and testing different approaches and strategies. In the end, it depends on the organisation and its structure to figure out the best regtech approach that fits their market and regulatory and compliance needs.
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