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Compliance & Risk

The Rise of Regtech and the Role of Startups

· 6 minute read

· 6 minute read

RegTech — the category of technology innovation concerned with monitoring, reporting, and complying with regulation — has long been viewed as a subset of the financial industry, but that definition has become incomplete.

The scope and complexity of regulation has widened to include almost all areas of commerce, and effectively managing regulation has never been so complicated and critical to business. As we’ve seen with the FinTech revolution, when problems are large enough, startups are usually the first to respond. As a result, a range of companies are stepping up to help businesses reduce the cost and risk of compliance while simultaneously identifying new business opportunities that arise in the wake of changing regulation.

Regulation, of course, is nothing new. One of the fundamental tasks of governments has always been to protect the rights of the many, often by limiting the actions of the few. However, recent trends have increased the regulatory burden on companies to such an extent that a new industry is forming to deal with this complexity. As a result, “RegTech” is expanding its footprint far beyond its traditional association with FinTech, and reaching all types and facets of businesses.

Some of the trends driving this increased regulatory complexity are:

The sheer number of rule changes is increasing — Even with the current U.S. administration taking steps to reduce the number of regulations — for example, by making a new rule that any new “economically significant” regulation needs to be offset by the repeal of two existing regulations — the total number of regulations continues to increase.

According to the Brookings Institute, around 40 economically significant rules have been repealed and 59 new economically significant rules enacted. The Code of federal regulations now fills more than 185,000 pages.

Regulation is broadening and impacting more companies — Regulation has long focused on industry verticals: pharmaceuticals, financials, automotive, food, etc. In the information age, however, companies are seeking to gain a competitive advantage from technology. Data, in particular, has become a strategic asset for those companies that can digitize it, structure it, and create a layer of value on top of it with software and analytic solutions powered by AI.

The widespread view that data has become a company’s strategic asset has created an incentive for companies to push the limits of what’s possible, and has given rise to the marketing revolution of using personal data for targeted advertisement as one means to monetize data. We don’t have to look very far to see how that can be exploited, as was the case with the Facebook Cambridge Analytica scandal. This shed light on a complicated problem, and a broader need to protect consumers and their data.

At Thomson Reuters, we help provide clarity for businesses and professionals operating at the intersection of regulation and commerce. In support of our many RegTech and partnership initiatives, including a recently launched global RegTech startup competition, we are dedicating a short series on why the rules of the game are changing for “RegTech”, showcasing how progressive early stage companies are stepping up to solve unique challenges, and why looking externally to partner with startups is foundational to the evolution of RegTech.

The regulation of data, such as the General Data Protection Regulation (GDPR) in the European Union and the California Consumer Privacy Act (CCPA), are examples of what we mean by “horizontal” regulation. The result is that companies across all industries and maturities that were formerly able to fly under the regulatory radar, are now saddled with a compliance burden.

The global nature of commerce — The full extent of globalization is evident in the supply chains of even the smallest businesses. The reality is that multinational companies must adopt the standards of the strictest jurisdiction they operate in and often apply those standards across their operations to ensure consistency.

Consider the proposed emission standards being set by California. Even though federal targets require average fuel consumption of 36 miles per gallon (MPG) by 2026, car makers are ignoring these standards in favor of optimizing their operations to comply with California, which has recent set it target to 50 MGP by 2026. In the case of GDPR, extreme violations of data privacy within the EU can result in fines of up to 4% of global revenue for every party involved. This creates the incentive to comply with the strictest set of rules.

Regulation as a driver of growth — Regulation is now often seen by governments as tool to help create new industries, not just to police existing ones. Consider the special economic development zones in China, the Silicon Roundabout initiative in London, or the green energy initiatives in the U.S. Through regulation and tax incentives, governments are driving growth by removing barriers for emerging companies. The result is that companies will need to monitor regulation not just to reduce risk, but also to find new opportunities.

The implication is clear: companies will need to divert resources to address this compliance burden and exploit new opportunities. The startup community is stepping in to apply new technologies to help companies monitor regulation and stay compliant at a time when those companies need it the most.

In this environment, partnerships between large and small companies are often times a good vehicle to bring innovative solutions to market faster. Forming partnerships enables these startups to take advantage of resources — like an existing customer base, marketing channels, industry expertise, content, and technology — that a larger partner could provide. And the deal isn’t one-sided. The larger companies benefit from the partnership by increasing their speed to market, adding new value-added offerings for their customers, and creating a testing ground and pathway for potential acquisitions in the future.

And RegTech — no longer a subset of FinTech — is a fertile ground in which these partnerships can blossom. Given the massive changes taking place, regulation has become a risk, a threat, a cost, and even an opportunity for companies of all sizes across all industries. It’s a dynamic area that demands the business community’s attention.

This article was co-authored by Nick Jarema, VP at Thomson Reuters Labs, and Quinten Fourie, Director of Emerging Technology Partnerships & Investments for Thomson Reuters.

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