The rapid advancement of technology has moved at an unprecedented pace, offering the ability to automate “trust” and “quality” of the products and services being provided on a daily basis. Nevertheless, after the financial crisis in 2008, billions of fines and penalties were imposed on companies that failed to carry out regulatory standards. This exposed market inefficiencies and focused attention on solutions required to stay on top of compliance matters.

To avoid repeating history, regulators and governmental authorities have reformed the regulations by repealing traditional rules and replacing them with new and efficient ones. These intricate and new regulations can be seen as a hindrance to upcoming technologies. Modern technologies such as blockchain, machine learning, big data or smart contracts have caused an uproar with the regulators as they require rigorous rules on data privacy to be enforced. These compliance requirements have spawned the need for regulatory based technology, commonly known as RegTech.

The average bank has 160 regulations, causing them to undergo continuous pressure to comply with the latest requirements. Regulators are now issuing non-compliance fines through financial regulations that have been enforced such as GDPR, PSD2 and MiFIDII. Some start-up companies are developing smart solutions to solve compliance issues by using cloud computing technology through SaaS (software-as-a-service). RegTech companies are increasingly known to use cloud based software to manage cash, financial risk, liquidity and hedging activities. The industry seems to be rising as a CBInsight report indicates that in 2016 there were 29 M&A transactions and 1 IPO related to RegTech companies.

So how is this new phenomenon going to assist us in the long haul? RegTech aims to assist in assessing and mitigating future risks and cutting back costs. This can be done by automating tasks that are time sensitive, scrutinizing and developing an audit pathway, and discovering non-compliant behaviors.   For example, current regulations can delay the process of integrating  new employees into an organization or familiarizing new customers to products and services. Integrating RegTech in a compliant manner helps curtail the time taken and cuts back costs while generating greater revenue.

Specifically, RegTech companies try to work together with regulatory bodies and financial institutions via cloud computing and big data to share the data quickly at a reduced cost. They simultaneously focus on protecting banks from any potential risks to comply with the rules imposed by the regulators. It’s imperative for any financial institutions to conduct a thorough assessment prior to investing in third party technologies such as RegTech. These assessments should be done prior to providing access to their internal processes to resolve any intricacies.

With the accelerated growth of FinTech, financial institutions may soon start to embrace the concept of RegTech. Fintech Global has recently reported that, in the last 5 years, investment in RegTech companies have dramatically increased. This in turn has drawn significant interest from venture capital firms, who appear to be heavily interested in RegTech companies. Further, RegTech will not only impact the financial institutions, but will also trickle down to affect industries such as the health care and insurance industry.

Frost & Sullivan forecasts that the RegTech industry will reach $6.45 billion by 2020. Such a rise is worth tracking and may bode well for M&A activity going forward.

The author would like to thank Nida Naz, articling student, for her assistance in preparing this legal update.

Stay informed on M&A developments and subscribe to our blog today.