Regulatory Technology (“RegTech”) can be described as the use of innovative technology to enhance regulatory processes and help institutions with their compliance obligations. Initially, used primarily focusing on financial regulation, its remit goes beyond industry borders and can be applied to any regulated sector like health care, insurance et al.
Why invest in RegTech?
The Cost of Compliance. As Mark Carney, Governor of the Bank of England, “Global banks’ misconduct costs have now reached over $320 billion.” But the damage doesn’t stop there. If that $320 billion was investment capital, “it could otherwise have supported up to $5 trillion of lending to households and businesses.” One has to bear in mind that the $320 billion ‘only’ refers to the fines that the world’s biggest banks have paid since the global financial crisis. It does not include various other factors that even increase the amount that is at stake, for example, the fines and charges paid by the entire financial industry and associated organizations from other sectors. It also does not amount for the cost of staff. For instance, JP Morgan has almost doubled the compliance and regulatory headcount to 43,000 within five years. Financial institutions have come to a point where they cannot through additional bodies at the problem as the cost of compliance for the overall business has already become such a burden that it is no longer feasible. However, with more regulation to come into force in the short and medium term and with such significant legislative acts like Markets in Financial Instruments Directive (MiFID II/MiFIR), Payment Services Directive (PSD 2) or the General Data Protection Regulation (GDPR) – to name only of a number of legislative acts to become applicable soon – banks cannot dial down on their efforts to comply with their regulatory obligations. The existing framework is not fit to keep up and RegTech is the only way to solve this.
RegTech does not simply aim to disrupt an established industry. Instead it provides solutions that will help the industry do what it does in a more efficient way saving not only money but also resources. It also opens to door for new revenues as many RegTech models deliver better insights on clients, counterparties and markets, which can be used to find new business opportunities. Furthermore, RegTech solutions almost address a real problem and are developed by seasoned industry professional unlike, for instance, other FinTech solutions, which may sound fancier, but are often less substantial. Especially, the aspect of having a solid team with the respective experience means that the execution and future success of a RegTech endeavour is significantly more likely to be successful.
RegTech is not limited to financial services. Unless other FinTech branches, regulatory technology is applicable in all industry that are subject to regulatory requirements. In particular, the use of RegTech in Pharmaceutical, Health Care or Insurance, while addressing different rules, is a field ripe for the application of innovative solutions.
Synergies. One of the key obstacles for RegTech firms as for any third party provider is the acquisition of clients from the point of identifying a customer and the correct contacts within an institution, to the identification of the specific needs of an organisation to the conclusion of a contract. With investments in dozens of firms, the fund will be able to facilitate the introduction for the firms in its portfolio by leveraging and cross-referencing existing contacts.
Why Blockchain Technology?
Blockchain technology is based on the concept of a continuously growing list of records, i.e. blocks, which are linked and secured using cryptography. Blockchain provides higher levels of security and transparency, can improve speed of transactions and reduce costs.
The RTO model aims to create an investment vehicle that primarily invests in companies that develop technology solutions that help organisations to comply with their regulatory obligations based on Blockchain. It will be issuing a Token that increases in value with its underlying portfolio – so it is very different from the current frenzy in ICOs and Cryptocurrencies. In line with our objectives, the new fund model will result in democratisation of investing and decision making, leaner and more transparent processes, as well as cost savings.
Considering the opportunities that a technology like Blockchain offers it seems almost strange not to use them to the best advantage for the investment process and management. With the benefits outlined above, RTO truly presents a unique chance.