Chapter 3 Exercises

The RegTech Ecosystem: Players, Platforms, and Market Dynamics

Exercise 3.1: Market Segmentation Analysis

Difficulty: Introductory

For each of the following institutional profiles, identify which RegTech market segments (financial crime, regulatory reporting, identity/KYC, trading compliance, regulatory intelligence) are highest priority, and explain why.

a) A retail-only digital bank with 500,000 customers, no trading business, and strong KYC automation but weak AML monitoring b) A mid-size US broker-dealer serving institutional clients with equity and derivatives trading c) A European insurance company subject to Solvency II d) A crypto exchange seeking licensing in the UK and EU e) A global investment bank with operations in 15 countries

Exercise 3.2: Build vs. Buy Decision Framework

Difficulty: Intermediate

Rafael Torres is deciding whether to build or buy a new regulatory reporting system for MiFID II transaction reporting. You have been asked to help him structure the decision.

Given information: - Current approach: manual spreadsheet process maintained by one analyst; produces late amendments ~3% of the time - Build option: 6-month project, estimated £400,000 in developer time, ongoing maintenance ~£80,000/year - Buy option: £180,000/year SaaS license; 3-month implementation; vendor has 150 MiFIR-reporting clients - Meridian's MiFIR reporting volume: approximately 15,000 transactions per day - The internal developer team has Python and SQL expertise but no prior MiFIR reporting experience - Regulatory risk of continued late amendments: FCA has published a thematic review noting elevated levels of MiFIR reporting errors across broker-dealers

a) Calculate the 3-year total cost of ownership for each option (assume build costs are Year 1 only; ongoing costs are recurring). b) List three non-cost factors favoring the build option. c) List three non-cost factors favoring the buy option. d) What is your recommendation, and why?

Exercise 3.3: Vendor Assessment

Difficulty: Intermediate-Applied

You are evaluating two AML transaction monitoring vendors for a mid-size bank. Vendor A is a pure-play AML specialist with a machine learning-based system. Vendor B is an integrated platform offering AML monitoring alongside KYC and case management.

Vendor A characteristics: - True positive rate: 92% (vs. industry average ~85%) - False positive rate: 70% (vs. industry average ~95%) - Implementation time: 4–6 months - Annual cost: £280,000 - Integration: API-based; requires integration with existing KYC and case management systems

Vendor B characteristics: - True positive rate: 85% - False positive rate: 88% - Implementation time: 9–12 months (full platform) - Annual cost: £340,000 (includes KYC workflow, case management, and AML) - Integration: All-in-one; replaces existing systems

a) If the bank currently has a KYC system it is happy with and a case management system that is "good enough," which vendor is likely the better fit? Explain. b) If the bank has poor KYC and case management systems it wants to replace anyway, does the analysis change? How? c) The bank's compliance team estimates it spends 12 hours per day reviewing false positive alerts at a loaded cost of £50/hour. What is the annual cost of false positive review under each vendor, assuming the bank's current true positive rate is 80% and false positive rate is 95%? (Assume 500 alerts/day currently; scale alert volume appropriately for each vendor's performance.)

Exercise 3.4: SupTech Impact Analysis

Difficulty: Applied

The FCA has deployed a new regulatory reporting analytics system that can identify statistical anomalies in transaction reports within 48 hours of submission — compared to the previous manual review process that typically identified issues at the next supervisory examination, often 12–18 months after submission.

For each of the following compliance behaviors at a broker-dealer, describe how the SupTech improvement changes the risk profile:

a) Submitting transaction reports with systematic errors in the counterparty LEI field b) Submitting all required transaction reports but occasionally missing reports for illiquid instrument transactions c) Submitting reports on time but with data quality that has deteriorated as the operations team is understaffed d) Delaying the implementation of a new required reporting field by two quarters pending IT resource availability

Exercise 3.5: The Consolidation Decision from the Vendor Side

Difficulty: Advanced

Priya is advising an independent RegTech vendor (a pure-play sanctions screening specialist with £12M ARR, 45 enterprise clients, and a strong reputation for accuracy) that has received an acquisition offer from a large banking software company at 8× ARR.

a) What information would Priya need to advise on whether to accept the acquisition? b) From the buyer's perspective, what is the strategic rationale for the acquisition? c) What are the risks for the vendor's existing clients if the acquisition proceeds? d) If you were a client of this sanctions screening vendor, how would news of the acquisition affect your relationship with the product? What actions would you take?

Research Exercise 3.6: Real RegTech Market Research

Difficulty: Research-required

Select three real RegTech vendors operating in different segments of the five-family taxonomy. For each vendor:

a) Identify which RegTech family it operates in b) Describe its core product(s) and the compliance problem it addresses c) Identify its primary buyer profile (G-SIB, regional bank, fintech, etc.) d) Determine whether it is a pure-play specialist or integrated platform e) Identify its funding status (VC-backed, publicly traded, acquired, bootstrapped)

Compile your findings in a three-row comparison table.