Written By:
Shak Ashraf
MD, Forte Markets
How Law Firms Can Leverage RegTech for Enhanced Compliance
As the FinTech revolution continues to roll out and disrupt financial systems and processes, regulatory compliance is on the verge of radical change too. These changes have largely been brought on by increasingly stringent regulatory requirements, which have prompted a boom in complex products and services to improve how firms handle their compliance requirements.
Obstacles to innovation in law firms
Innovation has passed through the regulatory space before. The past few years have seen an increase in the adoption of compliance-as-a-service technologies and other innovations that offer a fully managed service for key requirements such as know your customer (KYC) and anti-money laundering (AML).
However, the legal sector lags behind finance in terms of innovation and utilization of technology for regulatory compliance. One hurdle is that law firms aren’t focusing on internal innovation to prepare them for change. Changing internal systems and processes is a key step law firms need to take to update their legacy infrastructure and strained resources before implementing RegTech solutions as they navigate a changing regulatory landscape. Another option for law firms is to outsource part or all of their compliance responsibilities. Outsourced solutions can be advantageous since they can assure clients that they have the skills, knowledge, and expertise to meet the latest regulatory requirements.
Keeping up with regulations is time-consuming. A recent report by Thomson Reuters highlighted that up to a third of firms spend a full day each week tracking and analyzing regulatory change. Compliance is costly too. In the financial sector, firms spend between six and ten per cent of their revenue on compliance, according to research by RegTech firm Ascent. Ongoing Forte Markets research has identified certain medium-large law firms have between 5-10% of their workforce focusing on compliance. Whilst the amount legal firms will have to spend on compliance in the coming years is still unclear, it may be comparable to the financial sector—and even increase as new rules are issued to capture the increased use of AI and Big Data in legal decision making. Compliance costs will rise year on year as more regulatory requirements roll out.
A three-step process to better managing compliance
So, how can law firms manage their compliance journey and shoulder the additional costs involved as they strive to comply with an increasingly complex regulatory framework? The answer is threefold. Firstly, firms need to innovate internally to bring their legacy systems and practices up to speed. Then, they need to prepare for change and the additional costs this bears. Finally, firms can adopt technology services to partly or entirely outsource their compliance requirements at cost and utilize RegTech solutions.
New and interrelated technologies can make the process of complying with the expanding regulatory universe significantly easier for legal firms. Law firms can use RegTech services to their advantage to bring them up to speed as they navigate complicated regulatory frameworks.
How to prepare for rising compliance costs
RegTech can benefit law firms by lowering the cost of compliance and simplifying processes by using automation and standardization of regulatory practices. The extra advantage of this is that it frees up human resources from routine compliance tasks. The result is that firms can maintain their controls in a streamlined, cost-effective, and time-efficient way. A key feature of using RegTech is that it proactively checks for and identifies risks to mitigate them before they occur. Furthermore, RegTech allows firms to better understand their responsibilities and process vast quantities of data in seconds.
RegTech companies providing software-based solutions to overcome a variety of new regulatory challenges are cropping up at a considerable pace. The services they offer to assist in compliance can help at several key levels. Firstly, RegTech software can track existing and upcoming regulatory requirements as well as monitor transactions in real-time. Secondly, it can detect compliance and regulatory risks, assess risk exposure, and anticipate future threats. Adopting RegTech can also provide identity checks including due diligence, KYC, AML, and anti-fraud. Finally, RegTech can aid regulatory reporting by enabling greater automation and real-time capability when reporting to regulators.
Looking ahead, utilizing RegTech enables firms to adopt more efficient processes. Adopting technology to handle an increasing compliance burden is highly scalable and this can—in turn— promote great flexibility and growth within firms. One of our global partners and expert in legal technology Josh Lee, Chairperson, Asia-Pacific Legal Innovation & Technology Association says “Around the world, legal industry regulators are waking up to the need for updated regulations to deal with a much-changed legal industry. Further, technology regulations – like the EU’s upcoming AI Act – are poised to regulate technology applications used by law firms. Regulatory technology may not be a panacea to everything, but it should be part of an integrated strategy for lawyers to deal with increasing regulation in the legal industry.”
The future of RegTech solutions
The regulatory landscape has become significantly more complex in the past decade and new regulations are continually rolling out. Therefore, the scope for expanding RegTech services is significant. The growth and finessing of RegTech services over the next few years will likely make the industry as valuable as fintech as service providers listen to client requirements and develop more honed and niche services. What’s clear is that as regulatory technology continues to develop at speed, more research is needed to learn what specific services law firms need to help them comply with current and future regulations. What is a certainty is that the legal services cannot continue to be at the current level of maturity (or lack of) when meeting critical rules such as AML, conduct risk and data protection.. We need more data and transparency which in turn will result in a more robust, secure and compliant industry.
In that sense, Tracy Vegro, Executive Director for Strategy and Innovation at the SRA, explains that: “Supporting the development and uptake of innovation and technology within the legal sector is a key priority for the SRA, so we welcome research of this kind which provides greater insight into this area. The findings, especially regarding potential barriers to smaller firms accessing LawTech, echo the emerging trends we are also finding in our own research—the results of which will be published this summer.” To support the industry, Forte Markets has launched a research initiative with the Solicitors Regulation Authority (SRA) and the Law Society to deep dive into compliance departments of law firms of all sizes and help understand pain points and identify how tech can help resolve these.
To participate in the research visit https://fortemarkets.com/research/ or email us at
research@fortemarkets.com
References:
https://legal.thomsonreuters.com/en/insights/articles/cost-compliance-changing-world-regulation
https://legal.thomsonreuters.com/en/insights/articles/cost-compliance-changing-world-regulation
https://www.linkedin.com/in/joshleekokthong/
https://www.linkedin.com/in/tracy-vegro-obe-24503922/
Research