Fintech and Regulators III: Sharing a common goal

This third article in RBC Investor & Treasury Services' Fintech and Regulators series explores how technology-enabled innovations are redefining the relationship between central banks, regulatory bodies and financial services firms.

The rapid rate of fintech innovation has led to a sharp increase of vendors offering regtech solutions to financial services firms. While these tools are widely recognized as having the potential to streamline and simplify compliance obligations, there is currently a lack of uniformity in how authorities view these technologies. To mitigate the risk of regulatory fragmentation, a working group has been established to align policy-making approaches across jurisdictions.

The formation of the RegTech Council

In May 2017, the first RegTech Council meeting was attended by the Bank of England, the Financial Conduct Authority (FCA), and the European Central Bank (ECB). The working group was initiated by JWG Group, a financial services think tank, with the goal of bringing together key policymakers from around the world to identify and solve critical challenges in the implementation of regulatory technologies.

The RegTech Council aims to establish frameworks and roadmaps for the effective implementation of new regulatory technologies

"There's a perception that regulators are traditionally quite closed off. Previously, we found it difficult to engage with regulators on issues of collaborative implementation and technology, but over the last couple of years we've started to have a lot more dialogue," says Daniel Simpson, head of research at JWG Group.

By coordinating strategic dialogue with key policymakers, the RegTech Council aims to establish frameworks and roadmaps for the effective implementation of new regulatory technologies. The working group's key objectives are to:

• align implementation efforts of regulatory technologies across jurisdictions
• create shared standards for machine-readable and automatable financial reporting
• assist private firms in adopting regulatory technologies that reduce systemic risk

Anticipating regulatory obligations

In June 2017, the Financial Stability Board produced a report recognizing the potential fintech innovations have to reduce systemic risk.¹ The report found that technology-enabled innovations in the financial services sector could support the establishment of better-regulated markets, but cautioned that any benefits would be contingent on greater international collaboration and knowledge sharing. Authorities around the world have established regulatory sandboxes where regtech innovations can be piloted, and the RegTech Council hopes to use this positive momentum to unify frameworks and guidelines internationally.

“From the regulator's point of view, there's a clear need for the technological implementation of regulations. Since 2009, the sheer volume of rules that are coming through the G20 framework is very difficult to manage for regulators, and very difficult to enforce," says Simpson. “We've been working the FCA to write regulation in a machine-readable way that can be enforced in an automated way. It's still being discussed, but that's very much a long-term ambition."

Financial stability through data efficiency

In recent years, the financial services sector has witnessed exponential growth in the availability of technologies that extract, store and process transactional data. Distributed ledger technology, robo-advisers, and machine learning techniques each present new challenges for regulators as they analyze risks and determine potential new policy requirements. The RegTech Council provides a key platform for policymakers to come together and share the knowledge they have acquired about the latest fintech innovations.

Distributed ledger technology, robo-advisers, and machine learning techniques each present new challenges for regulators

“Regulators are getting better at sharing information about technology on a bilateral basis. What we can aim to provide in the Regtech Council is a wider forum for that to be debated," says Simpson. “We're trying to make sure we have a good balance of regulators, firms and technology vendors because they all bring a very different perspective. It's really important that regulators understand the language that firms use around regtech, and also that firms understand what the regulators are working to achieve."

According to the Transatlantic Policy Working Group (TPWG), regulators must adopt a holistic approach and reassess how they craft legislation and undertake their duties.² In a report titled The Future of RegTech for Regulators, the TPWG highlights that most regtech efforts are too focused on process automation and criticizes the FCA for not doing enough to redesign regulatory architecture. The TWGP believes the role of regulators needs to be augmented to “reduce complexity, improve oversight, and better monitor systemic and local risk in an increasingly data-driven world."³

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, agrees that regulators should be obtaining feedback more effectively from regtech startups. Speaking at the Leeds Digital Festival in the UK, Woolard called for broader cross-border consensus on how to accelerate the adoption of technology-enabled innovations. He noted, “With other regulators internationally, we want to build a common understanding of the principles of good innovation, working through bodies like the G20 and the International Organization of Securities Commissions."⁴

Bringing legacy systems up to speed

Around the world, technology-enabled innovations are altering the relationship between regulators and the firms they supervise. Regulatory sandboxes encourage a culture of collaboration where private sector innovations such artificial intelligence-driven fraud checks are being discussed and shared between the parties. At a time when the regulatory environment is becoming increasingly complex, helping authorities leverage techniques like machine learning is a key priority for the RegTech Council.

Regulatory sandboxes encourage a culture of collaboration

“The burden of new regulations doesn't just fall on the regulated firms. We're actually finding that regulators are under-resourced for the number of rules that they're being asked to enforce," says Simpson. “Using techniques like natural language processing, we can semantically understand financial reporting and divert regulation into something genuinely insightful."

The RegTech Council will continue to discuss how future policies can be implemented to make more financial data more automatable, more machine-readable and more compatible with machine learning techniques. By harnessing the appropriate regtech solutions, authorities can embrace the digital age and become more efficient at monitoring financial markets than ever before.

Next in RBC Investor & Treasury Services' Fintech and Regulator series, Fintech and regtech square up to AML.

---

---

Sources

1. Financial Stability Board (June 27, 2017) Financial Stability Implications from FinTech
2. Transatlantic Policy Working Group (June 2017) The Future of RegTech for Regulators: Adopting a Holistic Approach to a Digital Era Regulator
3. Ibid.
4. Financial Conduct Authority (April 26, 2017) The FCA's regional FinTech engagement