Regulatory technology

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Regulatory technology, Abrv: RegTech, is the use of information technology to enhance regulatory and compliance processes. RegTech is most usefully applied to heavily regulated industries and activities such as financial services, gaming, healthcare, pharmaceutical, energy and aviation. RegTech puts a particular emphasis on regulatory monitoring, reporting and compliance and aims to enhance transparency as well as consistency and to standardize regulatory processes, to remove ambiguity from regulations and provide higher quality outcomes at a lower cost. [1]

RegTech to date has been focused on the digitization of manual reporting and compliance processes in the financial services industry, for example in the context of know your customer requirements, and is often mis-attributed as a subset of FinTech. Its application to wider industries, such as energy, [2] confirm that RegTech is a subset of GovTech. [3]

RegTech offers significant cost savings to industry and regulators and a 2016 academic paper suggested that the potential of RegTech is far greater stating that "it has the potential to enable a close to real-time and proportionate regulatory regime that identifies and addresses risk while also facilitating far more efficient regulatory compliance". [4]

In contrast, a 2024 empirical study focusing on a regulatory change inducing United States–based financial advisers to adopt regtech around 2014 finds that overall, the damages avoided from reduced customer complaints are around one-tenth of the average costs reported in industry reports. [5] However, there may be other indirect benefits from regtech that are not considered in the study.

Origin

At a governmental level, the FCA was the first governmental body to establish and promote the term RegTech, defining this as: "RegTech is a sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities". [6]

In March 2015, a report by the UK Government Chief Scientific Adviser, stated that "FinTech has the potential to be applied to regulation and compliance to make financial regulation and reporting more transparent, efficient and effective – creating new mechanisms for regulatory technology, RegTech". [7]

Yet the vision of a technology-led regime has already been proposed as early as 2014, by Andy Haldane, during a keynote address at Birmingham University

I have a dream. It is futuristic, but realistic. It involves a Star Trek chair and a bank of monitors. It would involve tracking the global flow of funds in close to real time (from a Star Trek chair using a bank of monitors), in much the same way as happens with global weather systems and global internet traffic. Its centerpiece would be a global map of financial flows, charting spill-overs and correlations. [8]

On the private sector side, two pressure points have facilitated the development of RegTech. On the expense side, post-crisis fines have exceeded US$200 billion, [9] and the ongoing cost of regulation and compliance has become a primary concern industry-wide. [10] On the revenue side, competition from FinTech companies is expected to put US$4.7 trillion of revenues at risk. [11] These expense and revenue factors are driving the development of RegTech. As with FinTech, [12] the 2008 GFC represented a turning point in the development of RegTech. However, the factors underlying and the beneficiaries of RegTech are quite different. FinTech growth has been led by start-ups (now increasingly partnering with, or being acquired by, banks and other traditional financial institutions), [13] [14] whilst RegTech developments to date are primarily a response to the huge costs of complying with new institutional demands by regulators and policy-makers. [15]

For the financial services industry, the cost of regulatory obligations has dramatically increased, such that 87% of banking CEOs in one survey consider these costs as a source of disruption. This provides a strong economic incentive for more efficient reporting and compliance systems to better control risks and reduce compliance costs. Furthermore, the massive increases in the volume and types of data that have to be reported to regulatory authorities represent a major opportunity for the automation of compliance and monitoring processes. For the financial services industry, the application of technology to regulation and compliance was viewed as potentially increasing efficiency and the economy of scope and scale of incumbents. [16] A study on United States–based financial advisers suggests that government-induced adoption of regtech increased market concentration linked to heightened acquisition activity and labor flows of high-quality workers to firms with better technology. [5] However, there may be other indirect benefits from regtech that are not considered in the study.


Related Research Articles

<span class="mw-page-title-main">Financial regulation</span> Rules or restrictions for financial institutions

Financial regulation is a broad set of policies that apply to the financial sector in most jurisdictions, justified by two main features of finance: systemic risk, which implies that the failure of financial firms involves public interest considerations; and information asymmetry, which justifies curbs on freedom of contract in selected areas of financial services, particularly those that involve retail clients and/or Principal–agent problems. An integral part of financial regulation is the supervision of designated financial firms and markets by specialized authorities such as securities commissions and bank supervisors.

In general, compliance means conforming to a rule, such as a specification, policy, standard or law. Compliance has traditionally been explained by reference to deterrence theory, according to which punishing a behavior will decrease the violations both by the wrongdoer and by others. This view has been supported by economic theory, which has framed punishment in terms of costs and has explained compliance in terms of a cost-benefit equilibrium. However, psychological research on motivation provides an alternative view: granting rewards or imposing fines for a certain behavior is a form of extrinsic motivation that weakens intrinsic motivation and ultimately undermines compliance.

Compliance costs are all expenses that a company uses up to adhere to government regulations. Compliance costs incorporate salaries of employees in compliance, time and funds spend on announcing, new system necessitated to meet retention, and so on. Compliance costs happen to be as results of local, national or even international regulation. Global firms operating all over the world with varying new regulations in each country tend to face significantly larger compliance costs than those functionating solely in one region. Example – people registered for value added tax have to keep records of all tax to simplify the completion of returns. They need to employ someone skilled in this domain, which is regarded as compliance cost.
Compliance cost mostly includes following:

Anti-money laundering (AML) software is software used in the finance and legal industries to help companies comply with the legal requirements for financial institutions and other regulated entities to prevent or report money laundering activities. AML software can facilitate faster and more accurate compliance and investigations.

Vizor is an Irish software company that creates regulatory software for central banks, tax authorities, pension and insurance regulators, and other regulatory authorities.

<span class="mw-page-title-main">Vermeg</span>

VERMEG is an international software group operating across several lines of B2B services: pensions & insurance, wealth & asset management, financial & security markets and Digital Financial Services. The company develops software used across the private banking sector, consumer finance, asset management companies, central banks, insurance and other financial services providers covering insurance policy administration, asset portfolio management, regulatory reporting, collateral management, post-trade processing, low code application development, business process management and risk management.

<span class="mw-page-title-main">Financial Conduct Authority</span> British financial regulator

The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom. It operates independently of the UK Government and is financed by charging fees to members of the financial services industry. The FCA regulates financial firms providing services to consumers and maintains the integrity of the financial markets in the United Kingdom.

Fintech, a portmanteau of "financial technology", refers to the application of innovative technologies to products and services in the financial industry. This broad term encompasses a wide array of technological advancements in financial services, including mobile banking, online lending platforms, digital payment systems, robo-advisors, and blockchain-based applications such as cryptocurrencies. Fintech companies include both startups and established technology and financial firms that aim to improve, complement, or replace traditional financial services.

Research Exchange Ltd is a FinTech company servicing the global asset management industry operating under the trading name RSRCHXchange. Its platform, RSRCHX, is an online marketplace for unbundled financial research. RSRCHX provides asset management firms with a cloud-based repository of reports. Launched in September 2015, RSRCHX incorporates elasticsearch, compliance checks and Commission Sharing Agreement (CSA) and credit card payment administration. RSRCHXchange is one of a number of FinTech start-ups offering products which relate to MiFID II, the European Union financial reforms intended as a response to the financial crisis to improve the functioning of financial markets and enhance investor protection. RSRCHXchange's technology differs from other financial services vendors because its research catalogue is not dependent on RIXML, the industry-developed language for tagging documents. RSRCHXchange specialises in research unbundling, one of the most contentious topics of the regulation.

Financial technology is an industry composed of companies that use technology to offer financial services. These companies operate in insurance, asset management and payment, and numerous other industries. FinTech has emerged as a relatively new industry in India in the past few years. The Indian market has witnessed massive investments in various sectors adopting FinTech, which has been driven partly by the robust and effective government reforms that are pushing the country towards a digital economy. It has also been aided by the growing internet and smartphone penetration, leading to the adoption of digital technologies and the rise of FinTech in the country

The Cambridge Centre for Alternative Finance is a research institute established in 2015 as a part of Cambridge Judge Business School, University of Cambridge, United Kingdom. The centre's research focuses on financial channels and instruments that emerge outside traditional financial ecosystems.

<span class="mw-page-title-main">Banking as a service</span>

Banking as a service (BaaS) is the provision of banking products to non-bank third parties through APIs.

ComplyAdvantage, founded in 2014, is a RegTech company that provides software to help detect and manage risks associated with AML and Fraud. The company uses artificial intelligence, machine learning and natural language processing to help regulated organisations manage risk obligations and counteract financial crime.

<span class="mw-page-title-main">Douglas W. Arner</span> Hong Kong academic

Douglas W. Arner is a Kerry Holdings Professor at the University of Hong Kong (HKU).

<span class="mw-page-title-main">James Freis</span> American businessman

James H. Freis Jr. is an American lawyer and financial industry executive who from 2007 to 2012 served as the United States Department of the Treasury's 6th Director of the Financial Crimes Enforcement Network (FinCEN), where he expanded the scope of the anti-money laundering regulations and became known for spearheading efforts to combat fraud and implementing modern data analysis. He was an attorney and central banker at the Federal Reserve Bank of New York and the Bank for International Settlements.

Sir Rohinton Minoo "Ron" Kalifa is a British entrepreneur. He is the chairman of Network International, and formerly served as the chief executive officer of Worldpay Group from 2002 to 2013, continuing as vice chairman. Kalifa was appointed an Officer of the Order of the British Empire in the 2018 New Year Honours for his work in financial services and technology. He was later knighted in the 2022 Queen's Birthday Honours.

Asian Institute of International Financial Law (AIIFL) is a Think-Tank attached to the Faculty of Law, University of Hong Kong(HKU).

Ross P. Buckley is a Laureate Fellow and a Scientia Professor at the University of New South Wales.

FinTech Association of Sri Lanka (FASL) is an independent, not-for-profit cross-industry organisation representing Sri Lankan and the global FinTech community to support the development, innovation and investment in the FinTech sector.

FinTech Association of Nigeria known as FintechNGR is a Nigeria based self-regulatory, nonprofit and non-partisan organization focused on accelerating the growth of financial technology, facilitate investments and create enabling financial technological environment for innovation in Nigeria. Incorporated by Corporate Affairs Commission in 2017, FintechNGR interfaces with Nigeria financial regulators including the Central Bank of Nigeria, Securities and Exchange Commission, National Insurance Commission and the government to achieving its stated objectives. FintechNGR is a member of Global Fintech Hubs Federation and the Africa Fintech Network.

References

  1. ↑ "Is Regtech "The next big thing"? – First part - Banking blog". blogs.deloitte.ch. Retrieved 2017-11-09.
  2. ↑ "ClauseMatch and Gemserv Announce Launch of the Code Management Platform". Bloomberg. 23 September 2019. Retrieved 23 September 2022.
  3. ↑ "GovTech - Putting People First". World Bank. Retrieved 23 September 2022.
  4. ↑ Arner, Douglas W.; Barberis, Janos Nathan; Buckley, Ross P. (January 2017). "FinTech, RegTech and the Reconceptualization of Financial Regulation". Northwestern Journal of International Law & Business. 37 (3): 371. SSRN   2847806.
  5. 1 2 Charoenwong, Ben; Kowaleski, Zachary; Kwan, Alan; Sutherland, Andrew (April 2024). "RegTech: Technology-driven compliance and its effects on profitability, operations, and market structure". Journal of Financial Economics. 154 (April). doi: 10.1016/j.jfineco.2024.103792 . SSRN   4000016.
  6. ↑ FCA (2016-02-23). "RegTech". innovate.fca.org.uk. Financial Conduct Authority. Retrieved 2016-06-05.
  7. ↑ "FinTech: Blackett review - Publications - GOV.UK". www.gov.uk. Retrieved 2016-07-09.
  8. ↑ Andy Haldane, Chief Economist, Bank of England, Speech at the Maxwell Fry Annual Global Finance Lecture: Managing Global Finance as a System, Birmingham University 10 (Oct. 29, 2014).
  9. ↑ Cox, Jeff (30 October 2015). "Misbehaving banks have now paid $200B+ in fines". CNBC .
  10. ↑ "Thomson Reuters Annual Cost of Compliance Survey Shows Regulatory Fatigue, Resource Challenges and Personal Liability to Increase Throughout 2015". 13 May 2015.
  11. ↑ "The fintech revolution". The Economist.
  12. ↑ Arner, Douglas W.; Barberis, Janos Nathan; Buckley, Ross P. (October 2015). "The Evolution of Fintech: A New Post-Crisis Paradigm?". SSRN   2676553.
  13. ↑ Finextra (16 September 2016). "Banks rushing to collaborate with fintech startups".
  14. ↑ EY, Fintech: Are Banks Responding Appropriately? (2015); Andrew Meola, 1 in 5 European Banks Would Buy FinTech Startups, Business Insider (July 17, 2016),
  15. ↑ [7] See Gregory Roberts, FinTech Spawns RegTech to Automate Compliance, Bloomberg (June 28, 2016)
  16. ↑ "Compliance demands spur firms to invest in 'regtech' — and more". MIT Ideas Made to Matter. 8 March 2022. Retrieved 2024-04-10.
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