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Plutora Blog - IT Governance, Software Development, Value Stream Management

What Is RegTech? A Regulatory Compliance and Technology Guide

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The world would be in chaos without order and discipline. No matter how big or small a company is, it has to follow a set of rules and regulations specific to it to maintain order. The main purpose of following regulations is to prevent the company from harm and to ensure that the company behaves in a fair manner

Companies take internal and federal regulations seriously, but there are a lot of implementation challenges. To make this process easy, RegTech was introduced. So in this blog post, I will talk about what exactly RegTech is and how it helps in regulatory compliance.

What Is Regulatory Compliance?

The federal government defines laws and regulations for almost every industry. When you are running a company, you have to make sure you adhere to these laws. Imagine you manufacture automobiles. Having a seatbelt is one of the most important rules. As a manufacturing company, you have to make sure you adhere to it. If you don’t, you can’t sell your automobiles.

Regulatory compliance is a company’s adherence to the rules and regulations specific to it. The rules are different for different industries. There can’t be a mandatory seatbelt rule for an IT company that builds software. It just doesn’t make sense.

The regulations for a particular industry can be categorized based on the process. If you are running an IT company, you have to follow different rules for hiring, your work environment, sewage treatment, etc.

Now that you know what regulatory compliance it, let’s look at the challenges.

Challenges in Regulatory Compliance

Federal laws and regulations are serious, and there can be no compromises. Though the challenges are usually specific to the industry, later I will list the common ones in IT.

Starting Fresh With Regulatory Compliance

If you are building a new company, you already have a lot of things to take care of: setting up the place, hiring employees, developing business, and so on. Taking care of regulatory compliance becomes a headache because you have to start from scratch. Which rules and regulations apply to you depends on what kind of products you build. If your company is a service-based one, you will build many different kinds of products based on client requirements.

It is tedious for a fresh company to get on with regulatory compliance because you will have to check each and every law that might be applicable to your company. That’s just half of it. Once you list the regulations applicable to you, you have to implement them, which again is a time-consuming task.

Managing Regulatory Compliance

Regulatory compliance is not a one-time thing; it is a continuous process. In most cases, you will require a dedicated team to take care of it. Also, there are a lot of laws and guidelines that are not easy to understand for a person who has no knowledge of them. If you have no idea about certain federal terms and processes, the regulations would make no sense to you. Even worse,  you might misinterpret the regulation and put your company at risk.

Regulatory compliance requires experienced people who understand the business process and governance pretty well. People across the company need to collaborate. There has to be a clear understanding of the regulations and the business environment to meet compliance requirements. Hence, managing compliance becomes complex.

Staying Updated With Regulatory Updates

Regulations change and update frequently. You have to make sure that you regularly check for updates and implement them. It is not easy for an organization to keep adapting to frequent changes.

Suppose you are building a product, and during the design phase you are taking care of all the applicable regulations. After a couple of months, you are half done building the product. One day you walk into your office and learn about a new regulation that now requires you to change a major part of a product or the way it works. It is very frustrating for the people who have spent time building it.

This can also happen to a business process or a business model. It’s less likely, but it’s still possible. And even one such regulation could affect a company greatly.

Finding the Right Resource When Required

Most companies don’t have an in-house legal team because they don’t require one all the time. Such companies usually outsource expertise to legal partners or consultants who handle different clients at the same time. What if there is a new regulation that requires immediate legal assistance, but your legal partners are busy? This creates a bottleneck in the regulatory compliance process.

Because the legal team works remotely, it can be difficult to have frequent and clear conversations. Sometimes you have to conduct multiple communication sessions. Finding a time when everyone is free can take a while.

Finding a person with the right expertise is not easy, and it’s difficult for tiny companies that can’t afford to pay an experienced person.

These are some of the most common challenges. Now the question is, how do you get past them? One of the trending approaches is using RegTech.

What Is RegTech?

In short, RegTech is the practice of using software processes for regulatory management. A group of companies came together after realizing that technology could make the regulatory process easier. RegTech uses software as a service (SaaS)—cloud computing, big data, and artificial intelligence—to manage regulatory compliance, and it reduces the stress on compliance teams by automating the process. 

Cyberattacks, security breaches, and money laundering are common. RegTech helps organizations reduce these threats and is mainly used in, but not limited to, financial sectors and applications.

I have already listed the common challenges with regulatory compliance, so you have an idea of how difficult it is. Now let’s look at how RegTech works.

How RegTech Works

Before understanding the RegTech process, it’s important to understand the stakeholders involved. There are three main ones that play important roles: regulators, RegTech developers, and RegTech clients. Let’s briefly look at each of them.

Regulators

Regulators are the federal regulatory bodies that define the rules. They come up with new regulations or update existing ones. Regulations are mostly industry specific so that all companies belonging to the same industry can adopt them.

RegTech Developers

These are the tech people or companies who build RegTech software. RegTech developers carefully go through all the regulations set by the regulators. Then they work on building software to automate the whole compliance process.

The developers work on collecting all the information required, then create logic to monitor activity to detect any outlaws. RegTech developers have to take care to meet regulatory standards and also to understand the needs of the clients.

RegTech Clients

As the name clearly indicates, these are the organizations that make use of RegTech software. Once RegTech software is ready, the clients will run it to check which parts of the compliance process the software takes care of. Obviously the software won’t do everything. It requires some manual effort too. The clients must find a way to integrate the software into their compliance process. Basically, they let the software do its job and assign a person to do what the software can’t.

Now let’s dive into the process.

The RegTech Process

The RegTech process can be divided into four main parts: signing up customers, monitoring, detection, and reporting.

Signing up Customers

The first requirement of any business or process is a target audience. There is no point in having RegTech if there’s nobody to use it. So the first step is signing up customers.

Automating the process requires understanding the customers’ needs and the compliance processes your customers use. The signing up process involves validating and verifying your customers’ information and making sure it is legit. This is merely an onboarding process, but it plays an important role in preventing threats.

For example, if you don’t properly verify a customer’s assets and finances, you won’t be able to detect money laundering activities. And if this happens, it would compromise regulatory compliance, and the RegTech won’t be able to do its job.

So the signing up process is crucial.

Monitoring

The next step is monitoring. This is a continuous process of keeping an eye on all the customer’s activities. Once your customer is registered, they will have given you access to monitor transactions. The software will then look for suspicious activity.

The data generated will be big, especially for large companies. RegTech generally uses cloud computing and big data to manage data flow. The transactions can be in a structured or unstructured format. Irrespective of that, you have to convert the data into a format that your software is designed to work with.

Detection

This is where machine learning comes in. While monitoring transactions and activities, it is important to look for certain predefined patterns or flags.

Let’s take an example of writing logic to detect money laundering. You need to have in-depth knowledge of how money laundering works and different ways money can be laundered. Only then you will be able to write detection logic. You can use machine learning to discover money laundering patterns and then work on detecting it.

Reporting

This is what happens when regulations aren’t followed. When you detect suspicious activity and have enough evidence to prove a breach, you have to tell the regulators. There can be no compromise here because this will determine the integrity of your service.

Now that you know how RegTech works, let’s look at the benefits.

Benefits of RegTech

There are four main benefits of using RegTech for regulatory compliance: agility, speed, integration, and analytics.

Agility

Because RegTech uses technologies like cloud computing and machine learning, it can understand the process quickly. It can also adapt to changing regulations. That’s because machine learning is used to alter the process according to updated regulations. The Hadoop ecosystem can be used for the extraction, transformation, and loading of data.

Speed

RegTech accelerates the regulatory compliance process. Almost every task is taken care of by the software, so it works faster than humans. Breach detection and reporting are faster, reducing risks.

Integration

The RegTech process has different steps that use different combinations of technologies. For example, the monitoring phase uses cloud computing and Hadoop, and the detection phase mainly uses machine learning. Even so, integration is not difficult. RegTech can also be integrated into a company’s already existing regulatory compliance software.

Analytics

Looking at results in a prettified format is better than looking at it raw. Analytics helps RegTech represent information in an easy-to-understand manner. It can also help you filter data to show only what you are interested in.

While this may not be easy, I have something to help you out.

Plutora to the Rescue

Plutora is a value stream management platform and a one-stop RegTech solution. If you are planning on building or developing RegTech software (or any other kind of software), Plutora will give you a great advantage over your competitors. It provides various services for business intelligence, deployment planning, integrations, etc.

You can integrate your current data into Plutora without too much effort. This should help your developers focus mainly on their job and not worry too much about integration. If you move your data onto Plutora, you’ll have complete control and visibility.

With Plutora,  you will also have a complete view of your software delivery process. It will help you detect the choke points, eliminate waste, and reduce time to value.

Conclusion

It is very important for any organization to adhere to rules and regulations. As mentioned earlier, regulatory compliance is a tedious, complex, and time-consuming process. Getting help will reduce stress on your internal compliance and legal teams. RegTech helps you with the whole process.

And if you are getting into RegTech development, or if you are already in it, Plutora can dramatically improve quality and efficiency.

Omkar Hiremath Omkar Hiremath

This post was written by Omkar Hiremath. Omkar uses his BA in computer science to share theoretical and demo-based learning on various areas of technology, like ethical hacking, Python, blockchain, and Hadoop.