Technology, Regulation and Competitive Advantages

The confluence of emerging technologies and the rapid appreciation in the value of data has created new business opportunities for financial service providers, along with unique challenges for regulators looking to set ground rules in this evolving landscape.

In a world of increasingly porous borders, a high level of collaboration between industry and regulatory bodies will be essential as economies compete for technology and talent.

From surfacing client insights to generating predictive modelling, data has become a key asset for financial institutions and sparked a proliferation of fintech and regtech firms seeking to harness innovation and integrate it into new business models.

Data spurring fintech, regtech innovators

Where fintech applies technology to improve financial activities, the developing field of regtech marries technology with regulation to address regulatory challenges.

Both fintech and regtech have become key concerns for Australian investment managers, as shown by polling results at the “Technology, Regulation and Competitive Advantages" session at the Financial Services Council Summit in Melbourne. 60 percent of respondents said their organization intended to increase their fintech partnerships over the next three years. Over 90 percent felt fintech/regtech could create efficiencies and improvements across the Australian financial system that would “result in a positive outcome for end investors."

During the panel discussion, moderated by RBC Investor & Treasury Services' Marian Azer, Head of Product & Chief Operating Officer, Asia Pacific, Global Client Coverage, audience members learned that Australia's government has tried to encourage innovation through the establishment of a regtech liaison forum and by cutting red tape to allow fintechs to test services with retail clients through a class waiver for licensing.

Setting parameters that balance client and investor protection without constraining competition and innovation will be key for regulators

“We did that at the end of 2016 and it's fair to say six or seven entities have made use of it," said Mark Adams, Senior Executive Leader, Strategic Intelligence at the Australian Securities and Investments Commission. “The blueprint we developed for that sandbox...has been picked up by the government in dialogue with the sector, both agreeing to pursue further."

Benchmarking against global standards as geographical barriers break down

With technology breaking down barriers and facilitating the flow of information and intellectual property across borders, regulation has become a global issue as economies compete to attract talent and foster innovation. The playing field can often seem unbalanced, with certain jurisdictions offering perhaps more permissive access to data which may breach privacy obligations in others.

“The development of China's peer-to-peer lending market is a case in point," said Toby Heap, founding partner of H2 Ventures, an early-stage venture capital firm. Thousands of lenders have emerged to serve millions of clients by building credit models for them from data points including their phone usage history. “The example may be dramatic, but it serves as a reminder that regulators must benchmark with other markets before deciding where to ultimately set the bar," added Heap.

Technology has to be a part of the solution

“Where I think there's always room to improve is to realize that the market we compete in now, which used to be fairly geographically bound, is breaking down," he said. “So, relying on dominating your home market and being able to defend that from international players is getting harder."

“Berlin and Singapore have also been on the front foot in encouraging innovation, by creating favourable business environments that attract global tech companies to domicile there," said Heap. Foreign tech investment draws talent to the cities and simultaneously helps to develop the service industry ecosystem and keep tax on-shore.

Resolving today's challenges will require innovative tech solutions

Increasingly complex and dynamic compliance requirements are encouraging fintech and regtech innovation, as firms work to deal effectively with exponential growth in data. Even in mature economies such as Australia, firms have tended to “throw lawyers, compliance, and risk people" at regulatory problems rather than seek to adopt more innovative solutions, said Simun Soljo, a partner at Australia-based law firm Allens.

Regulation has become a global issue as economies compete to attract talent and foster innovation

“What we're also finding is that obligations are growing, and regulatory scrutiny is increasing, as is community scrutiny, yet there is a limit to how many people you can throw at the regulatory issue. Technology has to be a part of the solution."

Consequently, the potential benefits of artificial intelligence and machine learning are becoming clearer in regulatory compliance. Replacing paper-based compliance checklists with automated tools is an obvious starting point for firms that have traditionally relied on humans to sit down and review documents while holding “one hundred questions" in their heads, said Soljo.

“You have growing compliance teams, many of which may not have expertise in financial services," Soljo added. “That may result in inconsistencies in terms of approaches and outcome. In many ways, technologies can help to solve some of those issues."

Building trust is key to setting a favourable regulatory environment for innovation

Australia has seen a rapid proliferation of startups in recent years, and a number of these, including payments firms Afterpay Touch and Zip Money, have gone on to achieve high valuations. However, there are concerns that the country's tech industry is still being held back by regulation. Less than 40 percent of respondents polled at the “Technology and Regulation" session agreed that Australia's regulatory environment supported technical innovation.

Setting parameters that balance client and investor protection without constraining competition and innovation will be key for regulators, panelists said. Such a concern is particularly acute for startups that lack the resources of larger firms to meet compliance requirements. “Regulation, as important as it is, can also have a negative effect on competition if things aren't just right," said Heap.

Industry collaboration with regulators will also be important to establish and build trust in systems and applications that can often seem like a leap of faith for wary investors and consumers. “The role of regulation in its application to instill trust in the service providers, including fintech startups, is an important element," added Adams. “So we have to work together to ensure that this trust is not threatened, otherwise people will shy away from potential new business models and applications."