2021 RegTech in Retrospect
The RegTech space on the buy-side of the investment management industry has taken a little longer to mature than many expected, but 2021 witnessed an acceleration of maturity and the emergence of several firms with scale and a breadth of offering that provides more opportunity for strategic engagement.
A few years ago, RegTech on the buy-side was an industry that was seen by many as immature and proliferated by smaller, niche, single solution firms that carved out a “best-in-class” approach to a narrow problem set. In the last five years, the industry has witnessed the entrance of private equity firms as they seek to build RegTech offerings with scale, and a platform appeal addressing many inter-related problem spaces. Our industry is awake to the issues created by engaging multiple smaller boutiques and the duplicative integrations, operational inefficiencies, and balance sheet risks these bring to the table. The second round of private equity in-flow to the space is well and truly underway with the roll-ups of five years ago, being rolled up again in this second wave of investment – examples being the acquisition of Compliance Solutions Strategies by Confluence Technologies.
The recognition that the strategic approach applies as far upstream as possible with a comprehensive approach to centralization normalization and preparation of data for multiple (re-)use in compliance management and regulatory reporting use cases, is in many cases driving the emergence the scalable larger players. Successful RegTech firms recognize the strategic importance of data as the keystone in their product outlook – that core foundational element of product strategy that stands up their value propositions and solution stack for the long-haul.
Another key area for successful RegTech firms in 2021 was a clear recognition that RegTechs hold their people and the knowledge of their people in the same stead they hold their technology. The ability to monitor the regulatory landscape and adjust the product strategy accordingly, while keeping their client base constantly updated and in touch with the change dynamic, is a critical engagement criterion when investment firms are assessing their options.
Looking forward, we see the 2021 trending topics amplifying and become stronger. The focus on cybersecurity will only become more intense in 2022 as the industry unravels exposure to the Log4J zero-day exploit. Meanwhile, the continued presence of the pandemic in our daily lives has become the new normal, and is forcing firms and regulators to address key supply chain and outsourcing oversight. Regulators are also taking a longer-term view on work-from-home and the oversight and risk mitigations it expects firms to deploy when their workforce is in large part remote from the core office locations.
The mainstreaming of digital assets and cryptocurrency is not going away, and there is an emerging RegTech segment addressing the front-to-back-office value chain. We expect to see this solidify in 2022 as the regulatory community starts to draw crypto formally under their umbrella.
Finally, we cannot look back at 2021, nor look-forward to 2022 without a close look at ESG – while the European Union leads the vanguard with its sustainable finance package encompassing SFDR, The EU (Green)Taxonomy and CSRD, we see the UK very close behind with SDR (Sustainability Disclosure Requirements) and adoption of TCFD (Task Force on Climate-related Financial Disclosures) in the pension space, while the regulatory program of Chair Gensler at the SEC is clearly focusing on ESG as a core topic.
Some specific rule and regulatory changes to be alive to next year would be Rule 18F-4 in the US as it applies to use of derivatives by mutual funds, and the roll-in period to go-live on 1January 2023 of PRIIPs 2.0 and the ending of the grandfather period for UCITS, and Level 2 application of SFDR and the Taxonomy.
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