Capital markets regtech in review

While fintech investment is expected to grow at about $80bn a year, spending in regtech is predicted to go beyond $115bn in the next four years, according to Nick Cook, director of innovation at the UK’s Financial Conduct Authority (FCA), speaking at a conference in June.

But despite significant growth expectations, Cook said there were potential opportunities being overlooked in the industry.

“The regtech market isn’t fully able to service our needs at this stage. This is not a criticism of the market, like most other markets it responds to demand with supply,” he said.

“I don’t think we, collectively, have been sufficiently vocal about our needs and our desires to modernise and our appetite to adopt new solutions. Without this clarity, we have not and will not be identified as a meaningful and sufficiently attractive target market for the diverse players in the regtech ecosystem.”

Research published by EY along with Cambridge University in September found that two out of every three regtech vendors surveyed had a substantial market share or a physical presence in the UK, and almost half in the US.

With an ever-changing regulatory landscape, the dependence on technology solutions for compliance continues to grow.

A survey conducted by bobsguide in partnership with Inforalgo published in December found that 35 percent of the market believed that the Securities Financing Transactions Regulations (SFTR) had posed the biggest impact to their firm over the past year.

In April the regulatory and implementing technical standards for SFTR entered into force. The SFTR reporting requirements are staggered with the requirements for banks and investment firms going live in April 2020, for central counterparties and central securities depositories in July, and buy-side firms in October.

At the end of October this year, the European Securities and Markets Authority (Esma) published the final XML schemas for SFTR, with firms also having to implement messages into their development process to be ready for the reporting deadlines. But there have been concerns in the industry that delays to the level three text of SFTR – which is expected in December – could put pressure on reporting firms to implement necessary changes.

In the US, the consolidated audit trail (CAT) has over the past two years caused a number of headaches for the industry. Even with the Financial Industry Regulatory Authority (Finra) just taking over as the CAT processor from Thesys in June, the industry must be ready for the go-live date in April 2020.

There has been a shift in the relationship between regtechs and regulators, to a more collaborative approach. As part of its digital strategy, the Bank of International Settlement (BIS) launched an innovation lab in Singapore on November 13. There, the bank has set up a digital platform to connect central banks to regtech vendors. Through the platform central bankers can pose problems and challenges to vendors in seek of a solution.  

With a flurry of regulations being introduced over the past few years requiring transaction reporting, the need to reduce costs and the compliance burden has also become a key consideration for regulators.

The Bank of England (BoE) and FCA have run pilot phases with Barclays, Credit Suisse, Lloyds, Nationwide, Natwest, and Santander on the use of distributed ledger technology (DLT) for real-time regulatory reporting on financial transactions in the hope of reducing costs and driving efficiency. The bank expects to have an update on the initiative in January 2020.  

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