Regulation Tech Trends into 2023–Focus on Total Costs, Prerequisite for Growth, Higher Stakes

The year 2022 proved what many of us already know: Compliance issues can sink your business or help you survive in volatile, uncertain markets. Regulatory technology, or regtech, is how firms solve the riddle of complying with complex rules in an efficient way. It is also an essential part of risk management. As teams prepare for the new year, here are six trends for better regtech in 2023.

1. Cost of Services and Cost to Operate 

2. Regtech as a Business and Growth Essential 

3. Emboldened Enforcement Means Higher Stakes

4. Applying Lessons Across Asset Classes

5. Transparency and Mastery of Data

6. Cross-Product, Cross-Venue, Cross-Jurisdiction

Cost of Services and Cost to Operate 

Companies with the best technology typically win. This makes any technology inherently valuable. Now firms are facing inflation, dampened demand and higher labor costs, and are matching those pressures with their tech investments. So 2023 requires strategic plans—maybe for the first time this business cycle—with the reality of tighter corporate budgets. Thomson Reuters notes that, for compliance teams, “[c]ompeting priorities are compounded by tightening budgets and potential shortages of skilled professionals,” even though demands upon these teams are increasing.

In this environment, regtech gains an advantage when its sticker price plus the cost to deploy and operate—the total cost of ownership (TCO)—aligns with expectations. Clients will expect compliance software to handle routines so their workforce can focus on higher-value tasks. They will also place a premium on those regtech firms with compliance experts they can lean on when their own staffing resources are under pressure. 

Given tighter compliance budgets, gaining attention in 2023 will be regtech software that looks more like platforms upon which users can customize, configure, and self-service their own unique needs. This “buy-to-build” option avoids the upfront costs of coding from scratch and also avoids the costs of having to swap out inflexible vendors.

The hard reality is that regtech can save firms on their profit and loss statements only when properly selected and deployed. Selecting compliance software that is frustratingly difficult to implement will mean hidden costs. And regtech that cannot scale or with inflexible parameter tuning will eventually need to get replaced, again with added cost. Yet companies that select regtech with strong user experience and customer support will find it easier to retain their specialized compliance professionals and avoid costly hiring searches and gaps in coverage. 

RegTech as a Business and Growth Essential

Regulators often require certain compliance capabilities before a company is allowed to enter a given market. This is “regtech as business essential;” a needed piece before a company goes to market. Now in 2023, in the wake of too many market and compliance failures, we expect investors–not just regulators–will also expect compliance systems in place during funding rounds. This is “regtech as growth essential.” The need for compliance software will appear on companies’ business plans earlier and earlier. Many firms will even find “regtech as survival essential” depending on their business model and cash runway.

Investors are likely to ask more detailed questions about regulatory issues and deeper, more skeptical due diligence. Venture capital firm Sequoia in November promised investors it would conduct stronger due diligence because of steep losses it blamed on being misled by a portfolio company. VCs are taking longer to vet potential investments compared to early 2022. Finding product-market fit will include an assessment of how a start-up’s compliance capabilities match with a market’s regulatory requirements.

This trend is certainly true for digital asset companies, yet also is relevant for any firm growing their financial services business that could bump against sanctions, money laundering, insider dealing or market manipulation. Entering a new vertical or geographic market will include a keen eye to what regulatory risk is being assumed by the rest of the business and what technology is available to manage that risk. The positive result, however, is that it can be overall cheaper and quicker to build compliance into the product from the start versus having to reverse engineer later, according to Andreesen Horowitz chief legal officer Jai Ramaswamy.

Emboldened Enforcement Means Higher Stakes

Volatile markets and high-profile cases of fraud and abuse are spurring governments to react. When governments react, their weapon of first resort is typically enforcement.

Regulators globally are seeking more resources and latitude to pursue enforcement actions. In 2022, we saw a higher incidence of insider dealing cases and fines for crypto promoters. The U.S. Securities and Exchange Commission's (SEC) 2022-26 strategic plan leads with enforcement as the agency’s top goal and its newly doubled crypto assets enforcement squad will be looking to deliver results in 2023. In addition to issuing corporate fines, the SEC is asking more chief compliance officers (CCOs) to personally attest to their firm’s compliance practices, placing potential criminal liability on their shoulders. 

In 2022, the Financial Stability Board (FSB)—a body that includes all G20 members—stressed that regulators globally need more authority to guard against systemic risk from crypto. Hong Kong and Singapore are taking strict stances on crypto licensing and promotions. Even a mere investigation from a significant global regulator can sink a company’s reputation and burden it with threatening legal costs. Trust is gained in drips and lost in buckets.

In this environment, regtech, especially transparent software backed by compliance expertise, gains an advantage. Regulators expect a thoughtful understanding of risks, proactive use of solutions that they know exist and documentation. For instance, the Financial Conduct Authority (FCA), the U.K.’s main financial regulator, studied how firms manage technological change. The FCA concluded that “[r]elying on high levels of legacy technology is linked to more failed and emergency changes”and “firms with a lower proportion of legacy infrastructure and applications had a higher change success rate.” 

Applying Lessons Across Asset Classes

A stark lesson from 2022 is that “crypto” and “tradfi” are not in separate universes but part of a multi-asset approach to risk management. G20 leaders in November reiterated that crypto should follow the principle “same activity, same risk, same regulation” as other financial instruments. If firms hire talent that can apply the lessons from traditional finance and give them institutional-grade compliance technology, crypto risks can be measured and managed. If a firm integrates crypto too quickly or launches digital asset ventures without testing, the market will rightly be harsh and unforgiving.

Many established institutions in 2022 announced crypto or blockchain initiatives with varying degrees of ambition. These are the companies with careful due diligence histories and whose slower, more careful adoption of crypto could become a virtue as market players look for a steady hand. Meanwhile, the crypto industry is likely to “go back to basics” in 2023: trust and verify with proof, be transparent by default, prevent double-spending and double-lending. 

Those able to navigate the “crypto as tradfi/tradfi adopting crypto” dynamic in 2023 will be those with expertise  across asset classes, including regulatory needs. Compliance specialists will expect regtech to deliver multi-asset class capabilities, not break down analytics into silos. Trade surveillance to watch for market manipulation and transaction monitoring to identify risk are just two growth areas for digital asset compliance.

Transparency and Mastery of Data

Regulators, investors, and markets want more transparency heading into 2023. Supporting this need is a longstanding business trend: mastery of company data is a differentiator. This mastery starts with data ingestion, travels through analytics (rule-based and machine learning) and moves on to visualization so compliance professionals gain a deeper understanding of quantitative trends. 

Regtech in 2023 that adds transparency will need to maintain pace with seamless documentation, auditability and integration across other systems. Here, black box predictive analytics is less helpful and “explainability” gains an advantage. For example, a 2022 report about artificial intelligence (AI) in financial services from the Bank of England and the Financial Conduct Authority (FCA) said being able to explain a model was “vital” with regard to regulatory scrutiny. 

Cross-Product, Cross-Venue, Cross-Jurisdiction

In 2022, the need for “cross-product” in compliance technology increasingly received attention among industry experts and we expect this trend will continue in 2023. Regulators are signaling greater attention to cross-product manipulation involving trade orders on one financial instrument with the intention of affecting other products traded elsewhere.

The topic comes up in private discussions and during technical industry conferences. 

According to a survey conducted by Acuiti, it was the top reason compliance, technology, and trading executives said they were seeking third-party trade surveillance vendors. Canadian regulators this year announced they would share more data with each other to fulfill their “cross-market surveillance mandate.” For crypto, the Monetary Authority of Singapore in October recommended more global regulatory standards and industry codes of conduct to address cross-border market integrity risks.

Data mastery unlocks the ability to monitor potential anomalies across products on disparate venues in various global jurisdictions. 

Regtech Trends for 2023 Already in Motion

Throughout financial history, episodes of volatility, market pressure and high-profile business failures usually result in more government enforcement and compliance rules, which add more complexity and regulatory requirements. Allocating more resources to compliance systems—including selecting the right regulatory technology—becomes table stakes. No matter what direction the market moves in 2023, the gears are already in motion for firms to reevaluate whether their regtech protects them from external scrutiny and empowers them to better control risk.