Regtech: Good news for consulting firms?

By Zoë Stumpf.

The financial services consulting market is huge–the biggest single industry within the global consulting market. And one of the biggest slices of that is regulatory consulting–a particularly lucrative market for consulting firms especially since the global financial crisis of 2008, and the waves of new regulation that followed. Lucrative, but perhaps a little bit dull. For quite a few years, our conversations with financial services consultants have followed a similar pattern, with concerns about just how long the market will hold up against a backdrop of increasing commoditisation and price pressure, weighed against the irrefutable fact that this is an area that continues to keep vast armies of consultants busy. In terms of new trends, quite frankly, it hasn't been the most exciting area to either discuss or write about. 

But things have started to change. Rising interest in regtech–the use of AI and robotics to support regulatory compliance, and provide a “virtual compliance officer” functionality–is generating a lot of excitement of late. This is particularly true in the UK where the Financial Conduct Authority has established an innovation hub with a specific focus on regtech. So far in 2016 this has included holding two “TechSprints”, or “hackathons”–collaborative, technology based events aimed at rapid ideas generation and prototyping, attended by market participants ranging from banks, to consulting firms, to regtech start-ups. And although the UK regulatory body may be leading the way here, the excitement levels are rising globally, with consulting firms from the US to Singapore working hard to position themselves at the leading edge of change. 

The issue here is that as long as the thinking needed to advance regtech is challenging and ground-breaking, needing some of consulting’s finest minds to develop approaches and assets that will work for financial services companies, then this will remain an important and growing market for firms. But it probably won’t last forever. Indeed, even now, there is talk about the speed with which regtech services could rapidly move to the commodity end of the spectrum. Moreover, there is a whole swathe of remediation and compliance operations support work that will simply disappear for consulting firms once regtech is embedded–a significant threat to the continued growth and profitability of this part of the consulting market. 

Of course, the efficiencies delivered by regtech should, in theory, free up capital for investment in the many other areas that need it, including the type of large-scale transformation programmes that play to the strengths of consulting firms even more so than regulatory compliance work. However, against the backdrop of a wobbling global economy, Brexit induced volatility, and concerns about the health of some of the world's largest banks, consulting firms would be wise to think about their strategy. This challenging market could see appetites for transformation work constrained, with the result that consulting firms may have no choice but to work out how to make money out of a potentially shrinking and more commoditised regulatory market. Those that are able to “reap the whirlwind” of regtech in the near term could well be the best placed to achieve this.

To find out more about our report on the financial services consulting market, please click here.