EBA published a report that offers insights into the regtech landscape in EU. The report provides a mapping and understanding of the existing regtech solutions, examines the adoption status of such solutions, looks at the spending of financial institutions, and examines the impact of COVID‐19 and other trends and drivers on regtech development. The report assesses the overall benefits and challenges faced by financial institutions and solution providers in the use of regtech, identifies risks arising from regtech solutions that supervisors will need to address, and puts forward steps to be taken to support sound adoption and scale-up of regtech solutions. The actions aim to ensure technological neutrality in regulatory and supervisory approaches to regtech, while addressing any inadvertent obstacles within the Single Market to facilitate the adoption of regtech across EU.
The report looks at the application of technology-enabled innovation for regulatory, compliance, and reporting requirements and provides a deep-dive analysis into the five most frequently used regtech segments: Anti Money-Laundering/Countering the Financing of Terrorism (AML/CFT), fraud prevention, prudential reporting, information and communications technology (ICT) security, and creditworthiness assessment (addresses loan origination). In prudential reporting, the degree of automation varies heavily throughout the different parts of the reporting process chain. With 57% of all solutions not being in the production stage (36% reported in a vendor presentation stage and 21% in a proof of concept/pilot stage), the report notes that prudential reporting is the least mature of the major RegTech segments analyzed in this report in terms of implementation stages. Cloud computing is claimed to be used by 54% of regtech solutions providers while predictive data analytics are claimed to be used by 31% of them. In the report, EBA explains how some of the identified challenges are being analyzed through different initiatives around data standardization and the creation of common data definitions. The deep-dive on regtech for prudential reporting reflects findings identified in the EBA recent study on cost of compliance with supervisory reporting requirements; the study recommends wider use of technology and raising awareness of possible use cases for regtech in supervisory reporting.
Additionally, the report points out that financial institutions’ development of creditworthiness assessment regtech solutions remains at an early stage and most institutions consider developing these solutions in‐house. Regtech providers, however, seem to be willing to seize the opportunities of Open Banking to extend the range of their products and services and leverage their existing customer base to create or enlarge their digital ecosystems, including on credit products. According to financial institutions and regtech providers, technologies used to support creditworthiness assessment are artificial intelligence, including machine learning and natural language processing, Application Programming Interfaces (APIs), and cloud computing. The majority of regtech providers reported positive outcomes from the use of APIs, mentioning that through APIs, they can improve their product development process, including the speed of launching new products and services into the market. One major issue that financial institutions reported is the lack of written standards or guidance by regulators and supervisors regarding the use of new technologies (for example, clearly identifying what institutions are able to do or not and if supervisory authorities would allow the
use of alternative data sources).
Overall, financial institutions highlight enhanced risk management, better monitoring and sampling capabilities, and reduced human errors as the main benefits of use of regtech solutions. Regtech providers emphasize the ability to increase efficiency, quell the impact of ongoing regulatory change, and improve effectiveness. Evidence suggests that the majority of challenges to regtech market development are internal factors within financial institutions and regtech providers. These relate to data (quality, security, privacy), interoperability and integration with the existing legacy systems, a lack of application programming interface (API) capabilities at financial institutions, costly and often lengthy and complex due diligence processes, and limited awareness of regtech solutions. The current legal and regulatory framework has not been identified as the most material obstacle for regtech adoption. However, lack of common regulatory standards across member states could pose barriers for wider market adoption of regtech solutions across the Single Market. Building on the existing ongoing initiatives of EBA, ESAs, and competent authorities, EBA proposes the following steps to be taken to support sound adoption and scale-up of regtech solutions:
- Continue building knowledge and raising awareness about regtech among the regulatory and supervisory community and build convergent supervisory practices, primarily through workshops, forums, and targeted events. There is a need to have an efficient knowledge exchange and to continue to improve the knowledge and skills of regulators and supervisors on regtech.
- Continue the effort to identify where there is a need to harmonize the legal and regulatory framework across EU on identified priority issues by issuing guidance on regtech‐related matters or flagging any issues for the attention of EC
- Leverage role and expertise of the European Forum for Innovation Facilitators (EFIF) and the national Regulatory Sandboxes and Innovation Hubs to facilitate innovation by fostering collaboration and dialog between financial institutions, regtech providers, and competent authorities.
In the longer term, additional actions, such as the creation of a centralized EU database of regtech solutions or a potential certification of regtech could be further explored and considered at the EU level, along with an evaluation of who would be the best placed to implement such solutions. However, neither of those two options are within the current mandate and focus of EBA.
Keywords: Europe, EU, Banking, Regtech, AML/CFT, Fraud Detection, Lending, Credit Origination, Credit Risk, Reporting, EBA
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