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.

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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>

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

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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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