In our rapidly-evolving world, it’s getting harder for businesses to maintain compliance standards through traditional methods. Ever-changing compliance requirements have created a new industry for companies seeking to provide efficient and effective compliance tools. Specifically, new companies have emerged that combine regulatory compliance and technology, called regulation technology or regtech. Let’s take a closer look at what regtech is, how it works, and how regtech benefits multiple industries. We’ll also review the risks regtech companies face and how they can use regtech insurance and risk management strategies to reduce them.
An Introduction to Regtech
Regulation technology (regtech) is a relatively new technology industry sector. Companies in regtech use emerging technologies, such as machine learning and artificial intelligence (AI), to help businesses better manage their regulatory compliance.
Regtech is especially popular in highly-regulated industries such as finance and insurance, which were early adopters of the technology. However, any industry with compliance standards can benefit from regtech tools and processes, and investors are taking notice. Between 2022 and 2023, the global regtech market grew from $9.93 billion to $12.37 billion.
In the midst of the industry’s remarkable growth, regtech companies must establish robust risk management strategies to safeguard their revenue, audit insurance, and reputations. The consequences of a malfunctioning regtech tool or SaaS can be catastrophic for a company’s clients and may expose the regtech firm to potential legal actions from its customers, including saas insurance companies. To navigate these challenges successfully, regtech business leaders must consistently conduct audits of their technologies and stay vigilant in monitoring evolving client industry regulations to ensure ongoing compliance.
Regulatory compliance has been around as long as industries have been regulated by legislation and governing bodies. In the past, keeping up with current regulations and staying compliant could be a massive undertaking for a company. The purpose of regtech is to make it easier for companies to manage their compliance with laws and regulations through technology. Most regtech companies offer SaaS products to help customers manage their compliance efforts efficiently and at a lower cost than traditional methods.
The technology that regtechs use makes processing regulatory data faster and more agile. For example, a regtech solution may take thousands of data points from a government body and turn them into a compliance report within minutes. When done manually, the same task could take weeks. In addition, regtech solutions can be designed to integrate into existing CRMs or ERPs easily.
Regtech Use Cases
One of the most common uses of regtech solutions is to manage regulatory compliance regarding changing regulations. Businesses in highly-regulated sectors or multiple countries can use regtech to stay updated on their regulatory compliance needs accurately. A regtech solution could provide notifications when changes to regulations go into effect — and when a business must comply.
For example, if a financial advisor is required by law to meet with clients at least once per year, a regtech solution might notify them of which clients are about to go out of compliance. The financial advisor can then set up meetings with those clients to stay in compliance with regulations.
A more complicated use case for regtech is fraud detection. Many industries, such as the banking and finance industry, must regularly monitor their systems for fraud and notify governing bodies of instances of fraud. A large company may have millions of transactions to process when looking for fraud. Employing a regtech solution for this process would reduce the time it takes to verify the data and find potential fraud. Additionally, the regtech software would likely include the ability to notify the proper authorities, once again saving time and money.
The Market and Beneficiaries of Regtech
The financial crisis 2008 is generally considered the real beginning of the regtech industry. Thanks to new regulations and compliance standards, financial companies needed a solution to help them process data and stay up-to-date with compliance requirements. As the early adopter of the technology, the finance and banking industry is the most common beneficiary of regtech.
However, other industries are quickly learning how regtech can improve compliance efficiency and data quality. Any sector with compliance standards and governing bodies can benefit from regtech solutions, including:
- Insurance and Insurtech
- Healthcare and HealthTech
- Technology and Cybersecurity
- Education and EdTech
- Ecommerce businesses and retail
Regtech Industry Challenges
While regtech provides several compliance solutions for many industries, the regtech industry itself must face compliance and regulatory issues head-on. The main three challenges regtech companies face include:
- Regulation Conflicts: Not all industries have one governing body or compliance standard, making it difficult for regtech companies to keep up with changes and preferred standards. Companies that serve multiple markets, regions, or countries may also have conflicting compliance standards. To successfully help these companies, regtech businesses must be able to sort and analyze compliance requirements with speed and accuracy.
- Cybersecurity and Privacy Concerns: Cyberattacks have been on the rise for years — and show no signs of slowing down. Regtech companies are often third-party data systems in highly-regulated businesses. Therefore, regtechs must follow stringent cybersecurity processes to reduce their cyberattacks or data breaches risk.
- Regtech Adoption Challenges: Regtechs are regularly met with resistance, even in the financial sector. Many business leaders may still need to learn the benefits of regtech systems. In addition, legacy systems and outdated compliance processes can make it challenging to transition to using a regtech solution.
Benefits of Regtech Solutions
Regtech solutions offer a range of benefits and advantages to business leaders, from compliance teams to startup CEOs. Let’s take a look at how different businesses and stakeholders can benefit from using regtech:
- Financial Institutions and Banks: The financial industry is one of the biggest beneficiaries of regtech. Banks and other financial institutions can use regtech solutions to help monitor for and prevent fraud, identify and forecast risks for risk management, and stay up-to-date with fiduciary compliance requirements. Many regtech companies work exclusively with financial businesses, giving banks and other financial institutions access to experts in their industry.
- Regulatory Agencies: Regtech isn’t just for regulated businesses. Regulatory agencies can utilize regtech to make processing compliance data more efficient. Additionally, regulatory agencies can use regtech solutions to better inform regulated companies of regulation changes.
- Compliance Professionals: Compliance professionals will benefit from regtech solutions more than only some individual employees. From compliance analysts to general counsels, those professionals in the compliance industry can increase efficiency and lower the risk of errors using regtech solutions.
- Startups: As any startup founder or C-suite employee knows, working at a startup requires you to wear many hats. Regtech makes compliance easier for startups who may still need the budget for an entire compliance department. In addition, most startups are primed to add regtech solutions to their existing technology structure, as only some use outdated legacy systems. It’s much more likely that a startup is using the latest CRM or ERP and can easily integrate a regtech SaaS into their current systems for easy compliance reporting and monitoring.
The Importance of Strong Risk Management for Regtech
By its nature, regtech is integrated into technology and data. Any industry that uses network systems and has access to personal data faces inherent risks. For regtechs, a solid approach to risk management is essential to success in lowering the chances of three main risks:
- Cyber Attack or Data Breach: Regtechs have access to a lot of data. After all, being able to process compliance data quickly is the main feature of a regtech solution. However, the more access a company has to data — especially sensitive customer data — the riskier a cyber attack becomes. If a regtech experiences a cyber attack, their customers (and their customers’ customers) may face fraud, identity theft, or worse.
- Product Malfunction: Dealing in compliance management is a high-consequence undertaking, and regtechs need to be prepared if their product malfunctions or faces downtime. For example, a regtech’s internal network goes down, leading to a missed update on financial regulations. The regtech’s clients now have outdated regulation requirements and could face fines or regulatory discipline if the issues go unresolved.
- Directors and Officers Risks: A modern downside to startup culture is increased directors and officers liability. More consumers are holding C-level employees and directors accountable when things go wrong. While this can prove beneficial in some cases, it also means that regtech leaders must have risk management plans if issues arise from their products or companies.
Key Risk Management Practices for Regtech Companies
Regtech companies need to use a full range of risk management strategies to avoid the pitfalls of a security breach or product malfunction. In addition to the proper regtech insurance policies, such as cyber liability insurance, regtechs can protect their businesses using strategies including:
- Robust Cybersecurity Measures: Regtechs often deal with sensitive personal information and financial data, so they must employ the latest cybersecurity protections. This approach might include multi-factor authentication for all aspects of their products and updating and maintaining their network security systems.
- Comprehensive Compliance Frameworks: Any regtech company must maintain updated regulatory and compliance frameworks within their serviced industries and business. Having a comprehensive framework of compliance issues, reporting, and management requirements makes it possible for regtechs to stay in good standing within their industry while accurately serving customers.
- Continuous Monitoring and Auditing: Regulations change a lot. Regtech businesses must be at the forefront of these changes to provide services. A missed regulation or reporting requirement could lead to hefty lawsuits and fines from customers or regulatory bodies.
- Collaboration with Industry Experts and Regulatory Bodies: Collaboration is key for regtech companies. With an ever-changing regulatory landscape, especially if serving businesses in multiple regions or industries, regtech leaders need to build relationships with industry and regulatory leaders. These relationships help regtech businesses stay informed on the latest changes and can help them pivot as regulatory issues arise.
A robust risk management plan for regtechs is a way of handling risk, from legal actions to a plummeting reputation. Beyond the apparent benefits of risk management are other advantages a regtech can only gain through a robust risk management strategy. These additional benefits include securing high-value contracts, such as working directly with regulatory bodies, by limiting issues with regtech solutions.
Lastly, regtech businesses using a solid risk management plan are generally more agile than competitors without a plan. A robust program lets regtech companies easily identify threats and anticipate problems before they start, keeping the company ahead of issues.
Understanding the details of what coverage your regtech company needs can be confusing. Founder Shield specializes in knowing the risks regtech companies face to make sure you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right policy for you.