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Understanding RegTech Opportunities and Risks for Legal Services

April 4, 2018, 12:45 PM

Spurred by increasingly costly instances of non-compliance, breaches and fraud, a host of startups are seeking to transform the way corporations and law firms manage compliance issues. As the new technology gains a foothold in industry – and increasing financial backing – firms and legal departments need to understand the opportunities and potential pitfalls associated with RegTech.

What is RegTech?Regulation technology, or RegTech, is a branch of Fintech focusing on improving compliance and internal control systems. These solutions are designed to automate risk management processes, assist regulatory reporting, prevent fraud and enable organizations to stay informed of regulatory changes. The financial services industry was the first to adopt the technology, using it to screen thousands of transactions a day for money laundering, market manipulation, insider trading and third-party risk.

State-of-the technology – Seeking to Leverage AIThe rise of artificial intelligence and machine learning, as well as advances in hardware and distributed processing, are allowing RegTech companies to create solutions that are not bound by the limits of their programming but instead can learn to identify certain trends and patterns. The process, known as supervised learning, requires solutions to be fed structured data followed by training cycles where results are judged by programmers, which in turn, causes the AI to learn what is acceptable and what isn’t.

Goals: Lowering Costs, Increasing Speed and ConfidenceIn the short-term, the adoption of RegTech should allow an organization to reduce the costs of compliance by simplifying processes via automated mapping of regulatory risks to key business processes, reducing the need for manual checks. The use of advanced data analytics allows regulatory information to be analyzed in a number of different ways, including scenario analytics and searches for new or updated regulations, allowing firms to be proactive in identifying potential risks. When combined with enterprise-wide solutions, as well as risk and control platforms, RegTech solutions allow organizations to link controls and risk frameworks.

In the long-term, RegTech adoption helps protect an organization’s financial health and allows it to maintain market agility and integrity. RegTech can also provide increased confidence in meeting board agendas relating to issues such as transparency and proactive reporting of risks and compliance. The technology also allows companies to meet regulatory-driven data activities and support submissions to regulatory bodies.

For law firms, RegTech provides a wealth of opportunities. The technology can provide the foundation of new services for clients and with many financial institutions already using it for such purposes, a potential framework exists for law firms to implement them. Utilization and knowledge of RegTech solutions can also help a firm position itself as an authority in the field, boosting its reputation. Additionally, the adoption of RegTech for its own compliance and business operations could give a firm the ability to increase both its efficiency and scalability. Firms who can show they are innovating to provide cost and quality benefits to their clients will stand out among its competitors. The flipside of these opportunities is the risk of losing out to firms and vendors that are taking full advantages of these technologies in their operations.

Investment on the RiseCapital is flowing into RegTech startups at a record pace, with the expectation of rapid growth. According to data from CB Insights, approximately $5B in private equity has been committed across 585 RegTech deals in the last 5 years.

What’s Next?There are indications that the legal sector has been slow to adopt RegTech, but it’s not unreasonable to expect many firms both in the U.S. and globally will recognize the potential of these solutions and begin to implement them into their own operations. It’s also likely that regulators themselves could start adopting RegTech solutions to improve the effectiveness of their own monitoring, reporting and regulation.

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This legal market briefing was created by the analysts at ShiftCentral and is presented through an exclusive news and analysis partnership with Big Law Business. ShiftCentral’s team helps law firms, practice groups, and legal departments keep up with fast-changing developments in the business of law.Learn more here.

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