Regulatory compliance in Asia: Reasons behind the rise of Regtech

It’s been more than a year and a half since the COVID-19 pandemic wreaked havoc across the world and changed the day-to-day operations of businesses. Financial institutions and their regulatory compliance teams have not been free from the effects of the pandemic. As remote working has become the new normal, there have been bottlenecks in effectively carrying out compliance operations. On top of that, financial crime threats have been increasing as perpetrators made ‘good’ use of the pandemic situation to adapt their strategies. To solve these issues, financial institutions are increasingly turning to regulatory technology or Regtech.

While the reliance on technology to manage regulatory compliance operations rose across the globe, organisations based in the Asia-Pacific (APAC) are seemingly not shying away. The demand for Regtech is on the rise in the region in line with its recent surge in regulatory requirements, according to a report released by the Irish government-backed venture capitalist Enterprise Ireland and Kapronasia. According to Facts and Factors research, the global RegTech Market was estimated at USD 5.31 billion in 2019 and is expected to reach USD 33.1 billion by 2026, a growth rate of over 20% per year. The APAC region is expected to have the highest growth rate over this period.

Why is Regtech booming in APAC?

With its growing economic importance, the APAC region is expected to become the new engine of Regtech growth and innovation in the future, according to the report. It cites reasons such as “the rapid development of emerging Asian markets and financial systems, increased investment in new technologies and digital transformation, greater regulatory acceptance, and extensive infrastructure development”.

While Regtech uptake in the developed economies is driven by “a convoluted financial ecosystem and a rise in complex regulations”, the emerging economies are being helped primarily by “the business case and under-resourced regulators”. The report adds that the technology and compliance standards in emerging markets in Asia will mature along with their economies, paving the way for increased Regtech adoption. Let us look into some of the key factors that helped increase Regtech adoption in APAC.

• Digital transformation of APAC

The development of digital economies across APAC would help immensely for the growth of Regtech in the region. The internet economy of the region has been steadily growing. In Southeast Asia, the size more than tripled over the last four years to reach US$100 billion in 2019, as Malaysia, Thailand, Singapore, and the Philippines saw growth rates of between 20-30% per year.

The adoption of digital payment technologies is steadily increasing in the region and non-cash transactions are expected to account for almost one in every two dollars spent by 2025. These technological advancements bring in significant risks along with their unprecedented gains. Therefore, regulators in the region are expected to come up with new regulations to manage these payment technologies and platforms, resulting in more compliance obligations for financial services.

• Fintech growth and related risks

A Fintech revolution is currently underway in Asia, especially in Southeast Asia, aided by its robust economic growth, favourable demographics and high internet penetration. Amidst the pandemic, investments into APAC’s fintech sector totalled US$11.6 billion across 565 deals in 2020, compared to US$16.8 billion in 2019. Financial inclusion initiatives in the region led to innovative payment technologies which would require a new set of regulations.

A highly complex regulatory environment is coming up in many Asian markets due to disruptive technologies such as artificial intelligence (AI), machine learning and distributed ledger technology, and the entry of new market participants. Non-bank payment providers/systems are still largely unregulated, and increased regulation of alternative finance is expected over the next two years.

• Extraterritorial obligations

Many regulators in APAC are subject to extraterritorial obligations based on their international economic and political relationships. For example, international AML watchdog FATF hands out timely AML/CFT recommendations for its member countries to update their regulations. At the same time, interoperability and standardisation have become key focus areas of importance among regulators.

The need for data privacy and protection to mitigate payments risk and boost digital payment volumes is another area the regulators are working on, and they are introducing new data protection regulatory frameworks based on Western initiatives such as the General Data Protection Regulation (GDPR). Embedding global reforms such as Basel III requirements is also adding to their work.

• Growing AML/CFT concerns

High-profile money laundering cases such as the 1MDB scandal in Malaysia and the compliance breaches at Australia’s Westpac bank have forced regulators to become

more stringent with their scrutiny. They have increased regulatory reporting requirements and increased pressure on financial institutions to determine beneficial ownership and improve overall screening requirements.

This will undoubtedly lead to significantly high compliance costs for financial institutions. The projected cost of AML compliance across Indonesia, Malaysia, the Philippines, and Singapore combined is estimated at US$ 6.09 billion annually, with more than half of it in Singapore. With compliance costs rising, financial institutions are expected to turn to regtech solutions that can manage AML compliance in a cost-effective manner.

• New entrants and latest tech

New players are entering the market with next-generation regtech solutions that are not only cost-effective and easy to deploy but provide faster time to value. Cloud computing has become a new norm in many Asian countries, leading to the emergence of many Saas/PaaS Regtech players. Application Programming Interfaces (APIs) have gone into the mainstream and Regtech firms have been quick to add the model to their business.

Regtech solutions based on artificial intelligence/machine learning (AI/ML) are rising to prominence. Even if AI/ML is not yet regulated as technology, some governments are promoting their use for regulatory compliance and are creating frameworks to use AI/ML responsibly. For example, the Monetary Authority of Singapore (MAS) is working with the financial industry on an Artificial Intelligence Data Analytics (AIDA) framework. Such initiatives would augur well for the uptake of AI-based Regtech solutions.

Tookitaki: Regtech with a unique approach

Maintaining compliance has become difficult for the APAC region due to its frequent nature of moving funds across borders.

The region also suffers from increasing occurrences of financial crimes as a large number of the unbanked population adopts digital payments, making it harder for financial institutions to track capital flows. Therefore, regulators themselves are looking to capitalise on innovation and are encouraging others to try, test and adopt new-age Regtech solutions.

While Regtech is turning out to be a must-have rather than a good-to-have for financial institutions to manage their risk, Tookitaki, an Asian Regtech provider, and its next-gen solutions powered by AI/ML help financial institutions build and implement futuristic compliance programs in a faster and cost-effective manner.

To know more about our solutions and request a demo, please contact us.