REGTECH –The New Paradigm

Recognising the potential for technology to manage regulatory data and improve internal control and compliance.

REGTECHOf the number of growing trends within the global regulatory arena, monitoring of systemic risk and data driven regulatory oversight are two of the most prominent, and to a certain extent are intrinsically linked. In relation to the latter, data driven/machine readable reporting is gathering momentum at an astonishing pace.

The 2008 financial crisis, compliance failures at firms and deficiencies highlighted during regulatory examinations have all contributed to more and more demanding oversight requirements. Large firms that have suffered severe penalties for noncompliance have responded by significantly growing their compliance departments. However, compliance departments are viewed as cost centres and furthermore, adding more people to the department doesn’t necessarily produce a better compliance function.

Equally, the financial crisis and the global focus and concern in relation to liquidity within the markets, as well as the recognition and subsequent evaluation of non-bank systemically important financial institutions have all had a part to play in the push for more adequate monitoring of systemic risk. Regulators are concerned that the modern day structuring of financial instruments has been less than transparent. The result is a general undertone that no one really understands what is lurking beneath. And arguably, rightly so.

Increasingly, regulators and the regulated, are embracing the ideology that technology can work for them to alleviate the pressure, especially in this new data-driven/machine-readable world. This new openness has led to the emergence of “REGTECH”. Public use of the term has become more widespread since its use at the IOSCO 40th Annual Conference in June 2015, which attracts key regulatory authorities and industry leaders.

Compliance monitoring and quantitative analysis are two different things, and as we observe this shift to more quantitative-based regulatory oversight, the function of compliance needs to adapt. Technology will become a crucial tool, and the firms that provide it seen as strategic partners.

In support of REGTECH, regulators have openly communicated their wish to support digital markets and financial innovation, obviously with a caveat that providers must demonstrate ability to improve fairness and transparency.

Going forward, using technology to implement more efficient processes for data-driven monitoring and machine-readable filings should be a strategic objective for controlling compliance costs, in addition to mitigating against the cost of ‘noncompliance’ due to human error from manual work flows. The latter is trending right alongside REGTECH within the industry. The realisation is that asset managers have everything to gain by embracing the technology shift to comply more accurately and quickly which reduces operational cost.

The notion of REGTECH works both ways too. While the industry is actively searching for more efficient and appropriate systems and processes to deal with regulation, the regulators also recognise the need to become much more tech savvy to manage the data requests and understand and assess the Fintech space. Of primary concern to the regulators is how to handle the submission of data-heavy files and then manage the data analysis. The crux of their supervisory role has shifted on the back of the two trends discussed here and has now become a more quantitative role compared to the historically more qualitative desk-based supervision. An illustration of this is the recent UK’s Financial Conduct Authority (FCA) launch of a dedicated working group to look at REGTECH and the flurry of Fintech innovation within the financial services industry.

Embracing digital and Fintech disruption is increasingly being viewed as a building block for implementing cultural and behavioural changes. Asset managers are beginning to recognise that the necessary data gathering is valuable for their own internal management information, corporate strategy and objectives. Similarly, regulators can find ways to link the data submissions to more efficient supervisory processes. Scoping out and implementing technology will help them achieve their regulatory objectives to monitor global systemic risk and improve cross-border communication and information flow between agencies.

In addition to their supervisory activities, regulators are accepting the role they play to better understand the technology start-ups in their jurisdictions in order to identify their regulatory status quickly, provide clear guidance and help them go to market faster with these efficiencies, which will assist wider government and economic initiatives and drive innovation.

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