RegTech trends to look out for in 2023

In 2022, Jersey’s financial services regulator, the Jersey Financial Services Commission (JFSC), sourced independent research from RegTech Associates on ‘the adoption of technology for regulatory use cases (RegTech) by Jersey firms’.

Jersey’s deep financial services sector and growing digital sector made this report a pertinent one for the island. As well as providing analysis relating to technological adoption, the report included detailed findings on firms’ awareness, understanding and priorities with respect to regulation and technology:

• Financial Crime & Cyber, Identity and Privacy are the most highly prioritised regulatory compliance issues. Those use cases have also experienced the most RegTech adoption, indicating its utility in relieving firms’ most significant regulatory pressures.
• RegTech adoption remains low (over half of firms studied reported ‘Low’ or ‘Zero’ adoption) in most categories of regulatory compliance, uncovering the true capacity that remains in Jersey for productive technological gains.
• Low adoption is partially explained by a reported lack of understanding of RegTech, other significant barriers included difficulty of integration, a lack of supporting skills, and budget pressures.¹
• On the whole, Jersey firms feel that RegTech tools are necessary for achieving compliance and are the future of helping firms meet their regulatory obligations.

Jersey’s strong record of compliance with the latest international regulatory and technology standards is no coincidence. The JFSC’s commitment to innovation and technology is highlighted within the report, and is reflected in the decision to commission the report itself. Jersey’s technology-positive regulatory environment is one example of a more general change in the attitude of global regulators’^{2 3}. This shift increases the relevance of regulatory technology, as regulators’ expectations recalibrate to acknowledge the enhanced risk capabilities of firms properly utilising technology for compliance in comparison to those that are not.

For regulated firms and their partners, it is more important than ever to be aware of the trends in RegTech and, where possible, to get ahead of the curve. The remainder of this Vaiie Insights article sets out some of the key RegTech trends to look out for in 2023.

RegTech in 2023: Key Trends

KYC

Know Your Customer (KYC) is an important topic in any given year, given the consequences of a failure often include the enablement of criminality which has led to significant fines by regulators and associated reputational damage for the firms involved. But as 2022 drew to a close, certain events have placed KYC even higher on the agendas of firms and regulators.

At a high level, 2022 has seen identity fraud double in banking and crypto with significant consumer impacts and losses ⁴. The war in Ukraine has moved many existing and potential customers into the scope of sanctions - increasing certain incentives at an individual and nation state level to commit identity fraud. Like the War in Ukraine and sub-standard systems for KYC in crypto and banking, matters of regulation are set to spill into 2023.

Ultimate Beneficial Ownership (UBO) registers have been a key discussion point locally and internationally in 2022. To the shock of many, in November, the European Court of Justice deemed that enforcing complete transparency of UBO information to be invalid on the grounds of privacy and personal data protection but the debate is far from over and will continue in the months and years ahead.

With so much riding on KYC in 2022, and the inevitable persistence of certain key drivers in 2023, it’s appropriate to take a closer look at how RegTech can help:

Identity and Verification (ID&V)

Verifying customers’ true identities are fundamental to effective KYC. Traditionally, verification was done in-person with paper copies of identity documents. RegTech is revolutionising identity and verification. By digitising the process, RegTech significantly reduces the burden on customers and employees - improving the satisfaction of both. Vaiie Identify, allows customers to scan, store and transfer documents digitally from anywhere in the world through any web and camera enabled device. The technology then automates the extraction of information from documents, through a document template matching over 11,000 government issued ID types from over 248 countries and territories. Vaiie Identify requests a live image of the customer and performs biometric analysis to ensure the customer is who they say they are, at the same time as performing liveness checking to ensure that the customer is truly live. In the context of fast improving deepfake technology and the will of bad actors to use the technology for financial gain, liveness checking is set to be an important part of the digital identity verification process in 2023.

Client Onboarding

In client onboarding, firms must balance the desire of customers to move quickly with internal policies that typically must apply consistently across multiple operating jurisdictions, along with the internal, domestic and international standards (policies and regulations). RegTech can support this in a number of ways. Firstly, by creating structured auditable workflows, the process is better and more easily managed internally and can be adjusted for jurisdictional specific requirements. Further, by consuming and amalgamating open source data points, RegTech allows firms to take more data into account whilst reducing the informational burden put on clients. Finally, by implementing the principles and experimental results from nudge theory⁵ firms can present a less onerous onboarding process whilst still obtaining everything they need to complete the onboarding process.

Screening and Monitoring Solutions

Customers are not static, nor is their information always found in the same place. Firms KYC processes should therefore not rely on snapshots of a few narrow bands of information. Whereas ID&V covers the identity of individuals, screening and ongoing monitoring checks inspect a wider set of data points to infer the characteristics of the individual and to ensure that they do not pose reputational, financial crime or other risks to the firm throughout the duration of their relationship. RegTech solutions stepping into this space have utilised AI and Natural Language Processing (NLP) to find and process large amounts of structured and unstructured data, assessing its relevance and its implications on customers’ risk profiles. With the acknowledgement of criminality on the deep web and dark web, RegTech solutions are also crawling (mapping web pages), scraping (extracting data) and analysing (calculating the implied risk of a given customer) these web pages. As the improvements in AI models proliferate in 2023, these solutions can be expected to further reduce the false positives that cost firms and frustrate customers.

Practical AI

The last decade has seen plenty of excitement around the potential of Artificial Intelligence (AI) to transform products and industries. For all of that anticipation there was a growing sense that AI had not lived up to its potential⁶. However, in the latter half of 2022, rumblings of a ‘big leap forward’ began^{7 8}.

OpenAI released two highly accessible models, DALL-E 2 (text-to-image generator) and ChatGPT (a chatbot which writes code for you), which produce stunning results and have focused mainstream and industry minds alike on the already present power of AI.

AI, as an innovation and an efficiency-enhancing technique, has always been a key topic within RegTech and is a key feature in many RegTech products. So it should be no surprise to see these recent improvements reflected in RegTech products in the coming year as promise meets reality.

ESG

Environmental, Social and Governance (ESG) is another area that has pervaded the mainstream and beyond in 2022. ESG is no longer a secondary factor; it sits towards the top of every global regulators’ agenda and is subsequently becoming a priority for firms worldwide. Regulations designed to encourage or enforce better ESG practice across ESG factors among firms are being developed, these include the EU’s “Women on Boards” directive ⁹, and regulations, including the EU’s Sustainable Finance Disclosure Regulation (SFDR).

Crucially, in 2022, regulators are taking action on ESG matters. In the US, BNY Mellon and Goldman Sachs were each fined for greenwashing offences. In the UK, HSBC were forced to remove ads judged to represent greenwashing. However, there is still the sense that greenwashing and other ESG-related offences are widespread. The UK Financial Conduct Authority, for example, is currently reviewing the legitimacy of funds’ ESG claims, with lawyers claiming that it is only a matter of time until the regulator acts ¹⁰.

At their heart, RegTech and ESG solutions are risk management tools with many common processes and controls. RegTech providers have been developing ESG solutions for a number of years, and 2023 seems set for a convergence of product and regulatory maturity.

Until now, RegTech has supported firms in ESG compliance within 9 identifiable use cases (see Figure 1). Given the prevalence of greenwashing, it is no surprise that ESG ratings and analytics, the methods by which ESG credibility is established, is the largest category shown and it can be expected to maintain its strength in the context of tighter regulatory grips. Rigorous analytics and believable ratings are powered by accurate, timely and comprehensive data. Only now are we starting to see consistent regulatory standards emerge, ESG is a moving target in some respects, as new factors continue to be brought into scope. For these reasons, ESG data providers are expected to be prominent in 2023 and are likely to find new competitors appearing in the market.

The Future of RegTech: Longer Term Adoption

Web3

In light of the multi-billion dollar implosion of FTX at the end of 2022, the need for regulation in the Crypto/Web3 space, and technology to support it, is clearer than ever going into 2023. Already, over 50 RegTech products have been identified to support Web3 use cases¹². However, as discussed in our November 2022 report on The Future of Client Onboarding, Web3 is itself an evolving industry and one that still has a long way to climb on its maturity curve. Like the early movers in ESG, who are now reaping the benefits of getting ahead of the curve, the early Web3 RegTechs will be well positioned in years to come but the innovation driver in this space may ironically arise from enhanced regulation

Conclusion

2023 can be viewed with optimism from RegTech firms and clients alike, the regulatory environment is becoming clearer year on year and with greater regulatory certainty on both the expectations and the consequences of failure firms can take decisive action. Bad actors will continue to use technology to abuse the financial services system and the arms race to use more sophisticated technology will continue but there are significant technology breakthroughs happening that assist firms in their fight against financial crime.

With a range of products that contain AI, client screening, and identity verification, Vaiie is at the forefront of RegTech continually adapting as the market matures. Vaiie provides digital solutions aimed at enhancing the customer experience through identity verification, reducing onboarding time, and helping our clients achieve greater productivity as well as effective risk management. To find out more about Vaiie or any of our digital solutions, please contact hello@vaiie.com.