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How regulators are rethinking the supervision of emerging tech

Regulators adopt new strategies and digital tools to align with industry trends

Emerging technologies are driving rapid innovation in asset management and transforming business models. As asset managers increasingly rely on digital tools to streamline operations and realize new efficiencies, regulators are looking for ways to maintain appropriate oversight of this rapidly evolving industry.

Key insights

  • Supervisors are aiming to better understand how emerging technologies may impact business models by improving their knowledge of data processes
  • New digital tools are being introduced to augment regulatory activities
  • Regulatory sandboxes, accelerator programs, and innovation hubs have become commonplace and regulators are now seeking to take lessons from these gated experiments into the broader industry

Global management consulting firm Oliver Wyman believes regulators must act quickly to stay on top of the growing complexity of financial ecosystems. Their report titled, ‘Supervising Tomorrow’, based on a survey of leading regulators around the globe, found that all major markets are expecting to undergo significant change in the supervisory model over the next decade.1 Some regulators are already taking measures to define what this new era of supervision may look like.

The Monetary Authority of Singapore (MAS), for example, recently announced the creation of a dedicated technology group to improve data analytics capacity and to strengthen supervision of continually evolving technology risks.2 The move reflects the need for regulators to move both technology and data to the centre of their supervisory strategies as they seek to address the impact of ongoing change and disruption in the financial sector. More regulators are expected to follow suit and increase digital capabilities as the industry continues to innovate.

“The Monetary Authority of Singapore has taken great strides to redefine how supervisors should be thinking about emerging technologies and the new business models they are enabling,” says Hong Paterson, Singapore Country Head and Managing Director at RBC Investor & Treasury Services (RBC I&TS). “By merging cyber, data analytics, and regulatory roles into one division they have laid the groundwork for a new approach to supervision.”

Martin Andersson, partner at Oliver Wyman, commented that, “The transformation will be challenging. The way supervisory agencies are organized, the kind of work they do, and the kind of people they employ will need to change. The result will be agencies better plugged into the activity they supervise and better able to fulfill their economically vital mission.”3

Supervisory change must start from within

Regulators are expected to undergo profound change in their internal organizational structures over the next decade. According to the Supervising Tomorrow report, 90 percent of financial authorities believe more technology specialists will need to be recruited, while 80 percent anticipate demand for analytical skills to grow.4 An agile and flexible working environment could help attract and retain technical experts in the public sector, but broader cultural shifts may be necessary to prepare supervisory bodies for the changes ahead and the workplace of tomorrow.

More regulators are expected to increase digital capabilities as the industry continues to innovate

Supervisors are working more closely with market participants through regulatory sandboxes, accelerator programs, and innovation hubs. The Oliver Wyman report found that 75 percent of respondents expect to collaborate with financial institutions to test regulations.

Supervisors are required to remain neutral toward industry participants and both regulatory and institutional governance models may need to be revised to compel an unbiased level of collaboration, which may require the introduction of clear partnership rules.

New business models are prompting a reassessment of operational risk

Another challenge that supervisors face is the rapidly growing scope and complexity of the technological infrastructure underpinning the asset management industry. Disruptive developments in recent years such as robo-advisers, cryptocurrencies, and peer-to-peer lending are redefining business models. Regulatory authorities must learn and adapt in lock-step in order to help mitigate and manage potential industry risks.

Broader cultural shifts may be necessary to prepare supervisory bodies for the changes ahead and the workplace of tomorrow

In response to these emerging technologies and industry changes, authorities are reassessing their traditional risk-based approach to supervision. The Supervising Tomorrow report found that 70 percent of regulatory agencies believe that utilizing data to inform supervisory priorities will be the most significant change to the traditional risk-based supervisory model over the next decade.5 Greater expertise in data processes could allow regulators to anticipate how new business models will be enabled by emerging technologies and may allow them to become more effective in their duties.

Andrea Horton, Managing Director, Governance & Regulatory Solutions at RBC I&TS notes that, “Just as asset management firms must remain agile to new digital advances, regulators must also stay on the pulse of innovation.”

Supervisors seek to use data tools to augment their intelligence

Advanced algorithms have deeply impacted the asset management industry and increased the volume and velocity of transactions. Now, regulators are following suit and adopting automated technologies to detect anomalies and unusual patterns in data. By using technology to analyze data streams from funds and other financial institutions, regulators are aiming to establish a real-time view of the behavior of each sector of the economy.

MAS’ new technology group has already begun pioneering new technologies to detect market manipulation. The authority’s ‘Project Apollo’ is a digital tool that complements human decision-making with augmented intelligence. The tool models rogue behavior using traits identified by experts, and provides analysis and predictions during early stages of investigations.6 Other regulators are now seeking to employ similar supervisory technologies to improve efficiencies.

Just as asset management firms must remain agile to new digital advances, regulators must also stay on the pulse of innovation

In its latest ‘Trends, Risks and Vulnerabilities’ report, the European Securities and Markets Authority claims market participants are increasingly using new automated tools in areas such as fraud detection, regulatory reporting, and risk management. Meanwhile potential applications of new tools for regulators include greater surveillance capacity and improved data collection and management.7

As the use of technology increases across the asset management industry, so does the complexity and volume of data that is generated. It has never been more important for supervisors to adapt to the sector’s evolving landscape leveraging similar digital tools and resources.

 

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Sources

  1. Oliver Wyman (February 2019) Supervising Tomorrow
  2. Monetary Authority of Singapore (March 6, 2019) MAS Makes Senior Management Changes and Sets Up Technology Group
  3. Ibid. (February, 2019)
  4. Ibid.
  5. Ibid.
  6. Monetary Authority of Singapore (March 20, 2019) Enforcement Report
  7. ESMA (February 28, 2019) ESMA report on Trends, Risks and Vulnerabilities No. 1, 2019