27.02.

2023

REGTECH
Regulation:
 a law, rule, or other order prescribed by authority, esp. to regulate conduct 
 a rule or directive made and maintained by an authority
 an official rule or law

FinTech:
 Financial technology, or FinTech, refers to the use of technology to deliver financial solutions.
 “technology enabled financial solutions
 Created to modify and automate financial transaction for business and customers. 

FinTech Evolution
 FinTech 1.0 - the period that stretches from the laying of the transatlantic telegraph cable to
the development of the global telex network and which captures longstanding interactions
between technology and finance.
 FinTech 2.0 – the pre-GFC period underpinned by the digitization of traditional
financialservices, beginning with the first ATM and culminating in e-banking.
 FinTech 3.0 – the era post the GFC, characterized by the rapidity of technological development
and the proliferation of startups and IT firms providing financial services
FinTech 1.0: Infrastructure:
 The first era of modern Fintech involved building the underlying infrastructure that supports tod
ay's global financial markets.
FinTech 2.0:Banks
 The second era of modern Fintech involved the shift from analog to
digital, digitization of the financial system
 Full digitalization of internal processes, interactions with outsiders and retail customers 
FinTech 3.0: Startups
 The third era of modern Fintech, Fintech 3.0, involved dramatic increase in FinTech start-ups.
 High  levels  of  smartphone  penetration  and Application Programming Interfaces (APIs).
FinTech 3.5: Emerging Markets
 Expansion in digital banking around the globe, increasing number of new entrants and their last
mover advantages. 
 Strong  FinTech  development  supported  by deliberate  government  policy  choices  in  pursuit 
of economic development
FinTech 4.0: Disruptive technologies
 The increasing number of unicorns (privately held startup businesses with a value of over $1
billion) (ZIGURAT)
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FinTech Start-ups u think of some of these technologies

RegTech?

 A contraction of the terms regulatory and technology, describes the use of technology,
particularly information technology (IT), in the context ofregulatory monitoring,reporting, and
compliance.

RegTech should be?

 Considered a connected but distinct phenomenon

The financial system is:

 On the verge of moving from being based on “know your customer” (KYC) principles to a “know
your data” (KYD) approach.
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RegTech is distinct from FinTech:

 Application to other regulatory contexts

 monitoring corporations’ compliance with environmental regulations and real-time
tracking of the location of airliners.
 Exponential growth of compliance costs
 top-down institutional demand arising from the exponential growth of compliance
costs.

RegTech 1.0:

 When financial institutions began introducing new technologies to monitor and analyse risks of
specific regulations or processes.

Financial engineering and value at risk (VaR) systems became:

 Embedded in major financial institutions, ultimately proving to be among the greatest risks
underlying the GFC

RegTech 2.0:

 Increasingly heavy post GFC global financial regulations.

 Although RegTech development has been driven predominantly by industry participants aiming
to reduce their compliance costs
 digitization and datafication of regulatory compliance and reporting processes

Promising areasfor RegTech development:

 Big data
 Cybersecurity
 Cybersecurity represents one of the most pressing issues facing the financial services
industry
 Macroprudential policy
 promising ground for the evolution of RegTech

The shift toward a data-based industry is: inevitably accompanied by a rising threat of theft and fraud.

Financial Stability Board  (FSB)

Soften the severity of the financial cycle by using ?

 Large volumes of reported data to identify patterns, interconnections, and changes over time.

RegTech 3.0:

 Embracing the challenge of RegTech 3.0

 a move from ‘know your customer’to ‘know your data’ as financial institutions start to view risk
and regulation as data and prediction problems that can be addressed by technology.

The primary barrier to RegTech’s development is?

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 NOT technological limitations but, rather, the ability of regulators to process the large volumes
of data that the technology itself generates.

RegTech 4.0:

Predictive analytics — advanced analytics, cognitive computing, the cloud, artificial intelligence
and machine learning. 
Organizations are beginning to leverage artificial intelligence for: 
 Risk identification
 Compliance intelligence
 Identity management
 Background screening (Safe Systems). 
The three Cs:

1. Compliance
2. Cost
3. Complexity

Defensive ? meeting regulatory requirements.

Progressive ? efficiencies and customer benefits by automating some processes

Reinvention ? IP organization

Sandboxes are virtual environments used to ? test and examine the impacts of innovative new
processes or technologiesin isolation.

The FCA’s ( Financial Conduct Authority) sandbox has three core objectives:

1. To reduce time to market

2. To improve access to finance
3. To encourage innovation

Four alternative approaches to facilitating consumer engagement within the sandbox:

1. Informed consent model

2. Case-by-case discretionary model
3. Customers involved in testing have the same rights
4. Participating firms to demonstrate a willingness and ability to compensate any losses suffered by
customers.

Economic analysis and agent-based modelling techniques can be used to:

 Simulate the practical impact of proposed new policies.

In the wake of increased compliance burdens, regulators will need to work with FinTech and RegTech
players to:

(1) understand how data are being collected and processed

(2) take a coordinated approach to harmonizing compliance requirements across markets
(3) develop standardized reporting formats
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(4) enhance data sharing among regulators and transform the way in which such data are used

RegTech offers benefits to both:

 Industry
 control costs and risks more effectively, liberate surplus regulatory capital, and present
new opportunities for FinTech start-ups, advisory firms, and tech companies
 Regulators
 RegTech allows the development of continuous-monitoring tools to identify problems as
they develop and reduce the time it takes to investigate compliance breaches

Key technologies:

- Big data - Biometrics and cybersecurity - Machine learning

- Robotics - Distributed ledger technology

What is RPA?

 Robotic Process Automation is the technology that allowsto configure computer software, or a
“robot” to emulate and integrate the actions of a human interacting within digital systems to
execute a business process.

RPA robots utilize the user interface to? capture data and manipulate applications just like humans do.

RPA robots are capable of mimicking: many human user actions.

UiPath:Understanding automation types:

• Attended robots act like a personal assistant residing on the user’s computer to take a series of user-
triggered actionsto complete simple, repetitive tasksto streamline a workflow.

• Unattended robots require very little – in some cases, non–human intervention to intensive data
processing and data management capabilities needed to complete back-office functions at scale

• Hybrid robots are a combination of attended and unattended robots that provide user support

Anti-money laundering processes:

 involve handling a wide variety of documents with unstructured data and using a complex web
of disparate legacy systems. As a result, they are costly, slow, inaccurate, and highly manual.

Anti- Money Laundering: Adverse Media Monitoring

 Why it is important?
 Negative news can indicate a potentialrisk of financial crimes.
 As regulations become tighter and banks are underscrutiny for AML compliance,
 negative news search has become one of the key functions required by regulators.
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 What needs to be improved?

 Analysts face several key challenges:
1. Unstructured data requiring judgment and effort toward quality control
to validate decisions
2. High risk due to the “needle in a haystack” nature of this process and a
low tolerance for error
3. A fragmented process with tens to hundreds of analysts combing
throughountains of news articles
 How WorkFusion works:
 WorkFusion Intelligent Automation streamlines the negative news search process and
saves analysts’ time by:
 analyzing risk content,sentiment, relevant keywords
 explaining the risks described in news articles
 updating the data in core applications

Payment Screening Alert Disposition

 What needs to be improved?

 The existing manual process poses these challenges:
1. Variable text information requiresjudgment
2. No errors can be tolerated due to the risk of fines, so each transaction must be
reviewed by at least 2 people
3. Any decision must be auditable and justified for regulators
4. Repetitive tedious work might lead to errors
 How WorkFusion works:
 WorkFusion’s pre-trained bots review any payment messages for several common
false-positive scenarios and conduct research to justify their decision-making, validating
the scenario

Identity and biometrics: There are three possible ways of proving one's identity:

1. Using something you have. This method is relatively easy to do, whether by
using the key to one's vehicle, a document, a card, or a badge.
2. Utilizing something you know, a name, a secret, or a password.
3. Through what you are, your fingerprint, your hand, your face.

Biometrics is? the mostsuitable means of identifying and authenticating individuals in a reliable and fast
way through unique biological characteristics.

Major biometric modalities in banking:

•Fingerprint recognition •Finger or palm veins •Facial recognition •Voice recognition •Iris scan

BNP Paribas is: rolling out a Visa card that can store fingerprint information.

Challenges associated with biometric technology:

1. The accuracy of biometric technologies

2. store sensitive biometrical data on secure servers.
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3. FIs also combine biometrics with other measures

Multi-factor identity authorization:

 requires a user to present several separate pieces of evidence to an authentication mechanism

before access is granted.
 Typically, at least two of the following categories would be used:
 knowledge (something they know)
 possession (something they have), and inherence (something they are)

A distributed ledger: is a type of database that is shared, replicated, and synchronized among the
members of a decentralized network.

A blockchain: is a tamper-evident,shared digital ledger that records transactions in a public or private

peer-to peer network.

How blockchain network works?

 Instead of relying on a third party, such as a financial institution, to mediate transactions,

member nodesin a blockchain network use a consensus protocol to agree on ledger content,
and cryptographic hashes and digitalsignaturesto ensure the integrity of transactions.

Consensus:

- ensures that the shared ledgers are exact copies, and lowers the risk of fraudulent transactions,
because tampering would have to occur across many places at exactly the same time.

Cryptographic hashes:

- such as the SHA256 computational algorithm, ensure that any alteration to transaction input —
even the most minuscule change — results in a different hash value being computed, which
indicates potentially compromised transaction input.

Digital signatures:

- ensure that transactions originated from senders (signed with private keys) and not imposters.

SHA-256 is:
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 used in some of the most popular authentication and encryption protocols, including SSL, TLS,
IPsec, SSH, and PGP.
 SHA-256 is one of the most secure hashing functions.
 The US government requires its agencies to protect certain sensitive information using SHA-256.

Three properties make SHA-256 thissecure:

1. impossible to reconstruct the initial data

2. Having two messages with the same hash value
3. avalanche effect.

PSD2 regulates and harmonizes two types of services:

 Payment Initiation Services (PIS) -- facilitate online payment by helping “initiate a
payment from the consumer’s account to the merchant’s account by creating an interface to
bridge both accounts, filling in the information needed for the bank transfer and informing the
store of the transaction.” 
 Account Information Services (AIS) -- collect and store information from a customer’s
different bank accounts in a single place, “allowing customers to have a global view of their
financial situation and easily analyze their expenses and financial needs” (BBVA). 

The rapid evolution of FinTech demands a similar evolution of RegTech.

RegTech, a contraction of the terms regulatory and technology, describes the use of technology, partic
ularly information technology (IT), in the context of regulatory monitoring, reporting, and compliance.

Community of tech companies use cloud computing technology through software-as-a-service

(SaaS) that help businesses to: 

 Minimize risks related to data breaches, cyber hacks, money laundering, and other fraudulent
activities
 Comply with regulations efficiently and less expensively (Investopedia)

RegTech companies 

 collaborate with financial institutions and regulatory bodies using cloud computing and big data
to share information.
 Combine complex information from a bank with data from previous regulatory failures to
predict potential risk areas that the bank should focus on. 
 save the bank time and money by applying analytics tools needed for these banks to successfully
comply with the regulatory body

Acadia Soft: is one of the earliest software providers working on continuous monitoring. 

Machine learning is an application of AI. It’s the process of using mathematical models of data to help a
computer learn without direct instruction

Artificial intelligence is the capability of a computer system to mimic human cognitive functions such
as learning and problem-solving. Through AI, a computer system uses math and logic to simulate the
reasoning that people use to learn from new information and make decisions.
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Generative Pretrained Transformer 3 is an autoregressive language model that uses deep learning to pr
oduce human- like text.