Written by North Capital Administrator

RegTech: The Latest Startup Buzzword

What is RegTech?

In October 2016, International Business Machines (IBM) announced that it would acquire Promontory Financial Group, a financial consulting firm specialized in financial regulation and compliance. The financial details of the deal have not been disclosed. Through this acquisition, IBM plans to integrate Promontory’s expertise in compliance with Watson’s cognitive computing technology in order to help IBM’s financial clients reduce their compliance costs.


In the past few years, financial services companies have had a difficult time keeping up with new regulation. The annual volume of regulatory changes went up by 492% from 2008 to 2015, according to data from Thomson Reuters.1 As there are more changes in the financial services industry and the rules get more complex, the costs of compliance have risen significantly. Some of the world’s biggest banks have spent a significant amount of money on compliance (see table below).2

As compliance costs continue to be a growing burden for financial services firms, there has been a rise of companies in a new startup space dubbed “RegTech.” RegTech is a subset of FinTech and can be defined as the use of technologies to help companies comply with regulatory requirements in an efficient and effective way. The term “RegTech” came from a project called Project Innovate by the Financial Conduct Authority (FCA), the United Kingdom’s equivalent of the Securities and Exchange Commission (SEC), in October 2014. Project Innovate was launched to encourage the use of new technology in financial markets. According to the FCA Feedback Statement, in the first year Project Innovate supported 177 firms, and that number rose to 300 just eight months later.3 Following Project Innovate, in the first half of 2015, the FCA continued to explore how technology could help facilitate the compliance process in the financial markets through RegTech.


Typically, the RegTech space is segmented into three main areas:

Customer Identity Verification and Suitability

Financial services companies of various types are required to verify the identity of new customers, maintain records of the information provided by customers, and determine whether the customers appear on any list of terrorist organizations maintained by the Office of Foreign Assets Control (OFAC). In addition, FINRA Rule 2111 (Suitability) requires that broker-dealers “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security is suitable for the customer, […] to ascertain the customer’s investment profile.”4 Broker-dealers have to examine a customer’s investment objectives, investment experience, time horizon, liquidity needs, tax profile, etc. before engaging in any securities transactions. Certain types of securities offerings require specific income and/or net worth tests to qualify a customer for a particular investment, while other offerings are subject to state-specific Blue Sky laws and regulations.


Customer identity verification and suitability are two areas where RegTech can facilitate regulatory compliance. Technology allows companies to monitor transactions in real-time, better attempt to identify and flag potential money laundering (AML) activity, and quickly screen prospective customers against the OFAC and other terrorist and criminal watch lists. Algorithms developed by securities firms can help determine whether a particular security is suitable for a prospective investor. Sara Borazan, a Director-Principal at North Capital, has conducted KYC (Know-Your-Customer), AML, OFAC, and suitability checks for thousands of investors in private offerings. When asked about the impact of RegTech on her job responsibilities, Ms. Borazan explained that the technology allows for continuous checking of investors. “If someone is a repeat investor, the technology will automatically query all of the information in the investor database, and also look for any new information relevant to that person. RegTech saves me hours that I can use to focus on growing our business,” Mrs. Borazan said.

Conduct Monitoring and Risk Analysis

Under SEC rule 15C3-5 in the U.S., broker-dealers and high-frequency trading firms are required to maintain a system of risk management that sets limits on broker-dealers’ financial exposure and ensures that trading firms and broker-dealers are compliant with all regulatory requirements.5 Since business activities conducted by financial services firms are heavily regulated, it is crucial that firms maintain systems to monitor those activities in real-time and manage risks appropriately.

What Are the Benefits of RegTech?

The costs of compliance keep increasing every year, and a firm’s ability to increase its compliance budget is limited. According to a survey commissioned by Thomson Reuters Regulatory Intelligence between December 2015 and February 2016, 67% of respondents indicated that they expect the cost of senior compliance staff to rise in 2017. The major reason is that there is a shortage of professionals with strong compliance skills, and regulatory requirements are changing every year. The adoption of RegTech can help firms manage the cost of compliance by standardizing compliance processes and automating manual tasks.


As a case in point, the RegTech platform developed by North Capital and utilized by many of its customers costs about $17,000 per year, compared to the average national annual salary of $49,000 for a single KYC analyst.6 The firm’s clients have saved hundreds of thousands of dollars by utilizing RegTech. Also, financial institutions spend a lot of time tracking and analyzing new regulations. For example, 38% of financial services firms spend at least one man-day per week analyzing regulation changes, according to data by BBVA.7 Utilizing RegTech helps save valuable time that employees can use to focus on other important aspects of the business.


Lastly, financial services companies are often working with extremely large data sets, and analyzing the data sets is not a simple task. RegTech makes it easier and quicker to visualize data and identify trends or red flags.

Recent Funding Activity in RegTech

Deals in the RegTech space are on the rise. In the third quarter of 2016, there was $165M raised, the third-highest in RegTech financing history. The number of deals in the RegTech space are also increasing, from 74 deals in 2014 to 78 deals in 2015 and expected to be 89 deals by the end of 2016.8

The table below shows some of the significant RegTech financings in 2016. All data come from Crunchbase.

Challenges for RegTech Moving Forward

One of the big challenges for RegTech is data security and privacy. As mentioned earlier, financial firms deal with large volumes of data, and each time a firm collects information from a customer or investor, it is crucial that sensitive and personal information is used in a compliant manner. One area of future RegTech innovation is likely to be in software and services designed to detect and report vulnerabilities before a data breach can occur. Financial data is a big money business, and the cost of a data breach can be many millions of dollars.


Another challenge for RegTech is that the regulatory environment continues to evolve, and an investment in one RegTech solution in the current environment may not be relevant a few years later. For example, a host of companies have recently emerged to help financial advisory firms address the Department of Labor’s new fiduciary rule. However, analysts have suggested that the incoming Labor Secretary is likely to repeal the rule. Companies must remain nimble and be able to adapt to a rapidly changing regulatory landscape.


Finally, there is currently a lack of “data harmonization”9 between different countries. What it means is that regulatory framework in one country might not apply to another, and the data available for compliance checks in one country might not exist in another. As a result, for a financial services firm operating under multiple regulatory regimes, it might not be possible for RegTech to work seamlessly.

Final Thoughts

Financial firms are continually attempting to increase efficiency and cut costs. As a result, the demand for RegTech products is expected to increase moving forward. The big question is, can RegTech fully automate future compliance functions? RegTech, as of now, is capable of processing big data and identifying patterns. With that being said, compliance expertise remains a vital resource at financial services firm. These firms require qualified compliance personnel to ensure technology is functioning compliantly in the current regulatory environment.



Minh Le is an Associate at North Capital Private Securities, a registered broker-dealer focused on the marketing and distribution of private funds and securities.

1 http://www.businessinsider.com/ibm-is-launching-a-regtech-subsidiary-2016-1

2 https://www.ft.com/content/e1323e18-0478-11e5-95ad-00144feabdc0

3 http://www.crowdfundinsider.com/2016/07/88419-fca-feedback-statement-regtech-innovation/

4 http://www.finra.org/industry/faq-finra-rule-2111-suitability-faq

5 https://www.sec.gov/rules/final/2010/34-63241.pdf

6 https://www.glassdoor.com/Salaries/kyc-analyst-salary-SRCH_KO0,11.htm

7 https://www.bbva.com/en/news/science-technology/technologies/innovation/regtech-technology-also-helps-comply-law/

8 https://www.cbinsights.com/blog/regtech-compliance-startup-funding-trends/

9 https://www.iif.com/file/14970/download?token=vx29uy05



The views and opinions expressed in this post are the views and opinions of the author and do not necessarily reflect those of North Capital. All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.


This may contain forward-looking statements and projections that are based on our current beliefs and assumptions and on information currently available that we believe to be reasonable. However, such statements necessarily involve risks, uncertainties and assumptions. The charts, tables, and graphs contained in this post are not intended to be used to assist the reader in determining which securities to buy or sell or when to buy or sell securities.


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