The promise of regtech - Part I: Opportunities for global financial regulators

Initiatives that combine technology and regulation to enhance financial regulatory efforts and compliance are now captured under the term 'regtech'. Regtech is defined by the UK's Financial Conduct Authority as “a sub-set of fintech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities. The Institute of International Finance describes regtech as “the use of new technologies to solve regulatory and compliance requirements more effectively and efficiently."¹

Growing levels of regulation since the 2008 global financial crisis have brought the field of regtech into sharper focus. Regulators today are required to ensure that financial systems remain reliable and robust even as they are transformed by fintech. To date, the field of regtech has focused on process automation by “improving inefficiencies within regulatory reporting requirements and using technology to ease the burden of compliance."² Going forward, however, the domain of regtech may broaden to encompass an overall rethinking of the regulatory architecture supporting global financial systems. 

In 2017, the Transatlantic Policy Working Group (TPWG), a joint UK–US effort dedicated to global fintech policy discussion, released a report outlining four comprehensive models regulators are adopting in implementing fintech solutions for regulatory compliance,³ including: 

• the ecosystem approach
• the digital financial infrastructure (DFI) approach
• the rule and process change approach
• the use of regulatory and industry 'sandboxes' allowing regulators and industry to collaborate in the supervised growth of the regtech sector

This article explores the first two models supporting the regtech approaches adopted by regulators globally and as outlined in the TPWG report: the ecosystem approach and the DFI approach.

The ecosystem approach: regulators and industry working together at the leading edge

The ecosystem approach focuses on efforts to create an overall environment that supports and drives innovation and collaboration between regulators, industry, and, most recently, between countries. A healthy ecosystem will promote the free flow of ideas, technology, and talent between the participants, strengthening the global financial services environment while solving practical regulatory problems.

An ecosystem approach brings regulators and other players together through initiatives such as hackathons, which tackle industry-wide concerns like streamlining anti-money laundering processes and consolidating know-your-client information, as well as accelerators, which allow regulators to work directly with firms to pursue specific initiatives. 

A working example of the ecosystem approach is found in Singapore. As part of a vision of Singapore as a 'Smart Financial Centre', Singapore's central bank, the Monetary Authority of Singapore has formed a Fintech and Innovation Group under a Chief FinTech Officer. The Group has launched the Financial Sector Technology & Innovation Scheme which provides investments, grants and rebates in support of the local fintech ecosystem, and created a single point of access for all fintech matters through the Singapore National Research Foundation. 

The domain of regtech may broaden to encompass an overall rethinking of the regulatory architecture supporting global financial systems

Another example is found in the UK, where the Bank of England has established a Fintech Accelerator, enabling the Bank to work directly with firms to explore how technological innovations can be used in central banking. To date, results include a Real Time Gross Settlement Payments pilot with Ripple, an enterprise blockchain solution for global payments, and a project with MindBridge using AI to detect irregularities in financial transactions and reports, which ultimately will be used to inform regulatory data input reform.

More recently, the ecosystem approach has been extended to encompass regtech initiatives between countries. In March 2018, the UK and Australia conduct regulators announced their agreement to 'build a fintech bridge' between the two countries, establishing an "environment of regulatory consistency" that will enable companies to create products to service markets in both countries.⁴

The DFI approach: rewiring systems for ease and speed

The DFI approach focuses on streamlining reporting processes, moving regulators from form-driven to data-driven systems as an important step in “streamlining and digitizing regulatory compliance."⁵ 

The DFI approach focuses on streamlining reporting processes, moving regulators from form-driven to data-driven systems ⁵

For example, payment systems underpin much of the modern financial services industry. This allows participants, whether individuals, companies, or governments, to exchange monetary value securely and swiftly. Modern payment systems, however, have become increasingly complex as participants have moved towards electronic payments and real-time consumer transactions. The evolution in payment practices, the TPWG report notes, demands a corresponding evolution of the infrastructure supporting these transactions. 

The use of financial regulatory innovation is not limited to advanced financial markets and sophisticated systems. In developing countries, the DFI model can help improve inclusion and financial enablement, as well as reduce the prevalence and impact of regulatory red tape. 

Among the countries with a DFI model in place is the UK, where the UK Payment Systems Regulator has established a Payments Strategy Forum as a step towards collaboratively reforming the local payments infrastructure. As part of the Strategy, a New Payments Architecture has been created for the three interbank payment systems now active in the UK, with the goals of implementing a single set of standards and rules, a 'thin' central infrastructure, and a simplified method for processing and clearing functions.⁶ 

India provides a further case study. Its national digital identity program, Aadhaar, has allowed residents to obtain a unique 12-digit identification number, which in turn promises to transform the capacity for India to provide financial services to all citizens.

Thus far, the Aadhaar program has reduced regulatory red tape and resulted in more than 200 million bank accounts opened over the course of one year, 300 million new credit and debit cards issued over four years, and the rise of real-time digital services for more than 1 billion people.⁷

Looking forward: the possibilities of regulatory technology 

While fintech is transforming the financial services industry globally, regtech is changing the way financial institutions respond to regulatory and compliance requirements. Today, regtech represents a relatively narrow segment of the overall fintech environment, but may deliver broader benefits for risk and compliance functions. The ecosystem and DFI models for the development of regtech illustrate how regulators can move to adopt new strategies in order to meet the challenge of continuously evolving regulatory expectations. 

Part II of this series will explore the Rule and Process Change approach to regtech, and the use of regtech sandboxes.