How RegTech Is The Next Big Thing in Asset Management Compliance

By Gabrielle Inzirillo

Following the 2008 financial crisis, regulators worldwide rallied together to enhance scrutiny on the markets, marking an era of unprecedented regulatory cooperation as agencies fell in line with a common agenda. Dodd-Frank, Basel III, EMIR and most recently MiFID II, each makes up a piece of the regulatory jigsaw that asset managers need to piece together, in addition to business as usual. 

The promulgation of various policies, guidelines and frameworks which took place in quick-fire succession from 2010 onward, has fundamentally changed the way asset managers track, archive and distribute information in order to ascertain compliance.

Every cloud, however, has its silver lining. In late 2015, regulation was the latest industry vertical to undergo the “Tech” makeover. RegTech startups promised agility, speed and seamless integration to legacy systems, boasting increased efficiency and reduced margin of error. With 3 years of hindsight, we know now that these solutions haven’t scaled with the rapidity expected given the fervent enthusiasm displayed at onset, but have found their niche complementing existing processes. But with each week seeing an average of 45 new regulatory related documents issued, the cost of doing business all the while remaining compliant, can quickly become prohibitive for smaller boutique firms. Larger institutions do not fare that much better, with Bain & Co estimating that compliance accounts for 15-20 percent of ‘run the bank cost’, and 40 percent of ‘change the bank costs’. 

The first wave of RegTech solutions that came to light concentrated on Know Your Customer, anti-money laundering (AML) and fraud detection, all very interesting for retail and institutional banking but not quite catered to the asset management industry. Following the blanket rollout of MiFID II that imposed a high level of trade and transaction reporting, the doors were thrown wide open for RegTech startups to prove their worth to asset managers. This next wave of RegTech startups is embracing the challenge with gusto, leveraging natural language processing, machine learning, artificial intelligence and smart contracts in a bid to replace age-old processes, allowing asset managers to concentrate on their two main priorities, that of return generation and risk mitigation.

Thomson Reuters “Cost of Compliance Report 2018,” polled respondents from nearly 800 financial services firms across the world and found that 43% expect the size of their compliance teams to grow. 

regtech asset management compliance

Source: Thomson Reuters. Cost of compliance 2018.


With the burden of regulatory reporting increasing, coupled with lowering management fees, asset managers can no longer consider back office automation a “nice-to-have” feature but part of a set of “must-have” functionalities. Many of the tasks performed by the middle and back office are repetitive and labor intensive such as control checks, reporting and reconciliations all of which are ripe for automation. 

How Regtech is changing Asset Management compliance

For instance, asset management firms juggle to produce hundreds of disclosures for various market authorities due at different periods of the years. Instead of manually creating these reports every cycle, compliance teams could use their time on tasks with added-value benefits such as oversight and processes management, and instead employ robotic process automation (RPA) to generate them automatically.

RegTech solutions can also specifically answer use cases that have reared their heads following the tightening of regulation, one of the most cumbersome being that of adequately monitoring communication. More firms than ever are now obliged to record all telephone conversations that are intended to result in a transaction, regardless of whether the deals are on behalf of clients or themselves. In addition, they’ll have to keep those recordings for a number of years. With the advent of new communication channels via private messaging services, this is likely to require omnichannel surveillance. Machine learning can be applied to this vast amount of unstructured data in order to pick up potential red flags and ensure client managers are adhering to the strictest standard of care on behalf of the firm and its clients. 

It’s not just the financial industry that’s scrutinizing new technology to support their business objectives. Regulators as well have begun to adopt RegTech solutions in order to oversee compliance. Most notably, in 2017 the SEC began to test the capabilities of NLP techniques and algorithms to analyze Form TCR (Tip, Complaint or Referral) as part of its whistleblower program. Using the retrieved data points, the SEC analyzed the filings submitted by firms charged with misconduct in order to uncover patterns in the language used. Applying these algorithms to disclosures and investment advisor prospectuses were shown to increase flagging accuracy by five versus random sampling, in uncovering language that would merit additional examination.

Which goes to show if regulators are using RegTech products in order to catch nefarious activity, asset managers shouldn’t be afraid to delve into the revolution and harness these technologies for their own internal compliance oversight. 

However, there is a warning to heed: as with all nascent industries, not all startups are made equal and asset managers should remain cautious before choosing to upend their legacy systems. Over the past three years, innumerable RegTech firms have either rebranded to fit the trend or appeared on the market with little to no track record. It would be truly amiss to dismiss their contribution and potential, but it’s definitely worth siding with a trusted partner, such as Plug And Play, to make separating the grain from the chaff easier. 


There’s so much going on in Asset Management. At Plug and Play’s Fintech accelerator, we match cutting-edge startups with the largest corporations. Join our platform today.

Read the rest of the collection.

Find out how Wealth and Asset Managers are facing what's coming

Read More