What’s behind the UAE’s push for regulatory tech in wake of COVID-19

The UAE is encouraging its banks and financial institutions to utilise regulatory technology – increasingly known as regtech – to facilitate transactions as well as to  monitor and digitise regulatory-compliance processes.

As the coronavirus crisis forced companies over the last few months to change their business strategies to adopt remote working models and boost e-commerce offerings, the government has warned financial institutions to monitor their IT networks and above all, private data that is subject to regulatory compliance.

The coronavirus outbreak has resulted in a rising number of cases that involve cybercriminals stealing personal details and money through SIM card swapping, phishing and impersonation. The growing use of the internet and the presence of vital oil infrastructure have also made Gulf countries, and in particular Saudi Arabia and the UAE, the targets of sophisticated cyberattacks that are aimed at stealing personal data and, in some cases, exposing state secrets.

Last month, a group of financial regulators, including the UAE’s central bank and the Abu Dhabi Global Market (ADGM), issued guidance urging companies to improve cybersecurity and take measures to mitigate the risks of money laundering and terrorist financing.

In accordance with the standards set by the Financial Action Task Force (FATF), the UAE’s regulatory authorities encouraged the use of technology including fintech, regtech, and suptech (supervisory tech) to “the fullest extent possible,” they said in a statement.

Using technology to verify customer identity

At a subsequent webinar hosted by the Dubai International Financial Centre, Dubai Financial Services Authority CEO Bryan Stirewalt, said that “the purpose of the joint guidance was to encourage financial institutions to use technology to assist with the collection and verification of customer identity.”

Regulatory and investment support for UAE-based, financial-technology companies is growing. Fintech startups – internet-based payment services, online banks, and cryptocurrency exchanges – are experiencing high demand for their services as corornavirus lockdowns restrict physical movement.

Within the burgeoning fintech industry, regtech companies are offering technology that often incorporates AI and RPA (robotic process automation) to help financial institutions meet regulatory requirements more efficiently and effectively than traditional compliance processes.

Due to regtech applications, banks and financial institutions have made great advances in customer onboarding, know your customer (KYC), and anti-money laundering systems. According to consultant Grand View Research, the global regtech market is expected to reach US$55.28 billion by 2025.

In addition, suptech is beginning to tackle challenges faced by supervisory bodies by automating and streamlining administrative and operational processes.

Remote working spurs regtech adoption

The dependence on regtech is expected to grow as adoption of remote-working models changes traditional business processes. “It may be more difficult for businesses to adhere to their existing customer identification and verification processes in seeking to meet customer due diligence obligations,” the UAE regulators said in their statement.

The disruption also generally increases the risk of financial crimes. According to an FATF report, COVID-19-related Money Laundering and Terrorist Financing Risks and Policy Responses, criminals could find ways to bypass customer due diligence measures by exploiting temporary challenges caused by remote working situations, in order to conceal and launder funds.

The report goes on to state that a majority of FATF members have either postponed their anti-money laundering and combating-the-financing-of-terrorism inspections or substituted them with remote-based inspections. It encouraged the use of digital payment options, aong other measures.

In April, regtech startup Nexus FrontierTech said it was collaborating with the Financial Services Regulatory Authority (FSRA) of ADGM to spearhead the use of AI to automate license application processes for venture capital fund managers.

Applicants can interact with a “regbot,” which utilises natural language processing (NLP) and machine learning to identify information and risk gaps in the application. For example, if the applicant does not provide adequate information on risk management systems in relation to a regulatory requirement, the regbot will prompt the relevant response from the applicant.

“The market often accuses regulators of being resistant to change, I do not think that is true today,” said the DFSA’s Stirewalt.

The UAE is well-positioned to take advantage of regtech, experts say.

The Gulf country’s free trade zones and federal legal regime have given birth to a complex network of financial and regulatory systems – an area where regtech will have an important role to play, said Muneer Khan, Partner, Financial Markets, Simmons & Simmons.