The rapid development of technology in finance and other sectors has resulted in many new risks, some of which were unthinkable just a few years or decades ago. This frantic pace has resulted in the emergence of the field of regulatory technology, or regtech.
Regtech’s main concern is harnessing technology to manage regulatory processes within the financial industry, ensuring compliance and addressing associated risks, such as violations. A lot of these technologies are similar to the ones used by companies in other aspects of their business – automation, artificial intelligence, machine learning, and others.
Subas Roy, partner at Oliver Wyman and founding global chairman of the International Regtech Association, spoke with Corporate Risk and Insurance regarding the growing field of regtech and how technology and regulations interact in this highly digitalized world.
According to Roy, the regtech sector has been growing strongly in double digits since around 2015, with the UK and Singapore figuring as some of the global hubs for regtech. Regulators, such as the UK’s Financial Conduct Authority (FCA) are actively supporting the growth of the sector. Roy mentioned the FCA’s flagship program, known as TechSprint, which brings together participants from across and outside the financial services industry to work on various technological solutions to challenges faced by financial firms. Participants include large banks and insurers, financial technology start-ups, consulting firms, and academics from top universities globally. He added that one of the major topics usually discussed in TechSprints is financial crimes such as money laundering, as well as strategic transaction monitoring.
Regtech is especially important, as, according to Roy, since the financial crisis of 2008, the cost of regulatory compliance has increased three-fold. In response to this, the FCA is leading efforts towards automating regulation, such as digital regulatory reporting, which codifies regulations and allows it to be integrated into the financial institution’s digital processes.
“We need to find better controls and better compliance checks, but it needs to be in a less expensive manner,” said Roy. “As such, digitizing the way to comply and digitizing the way to demonstrate regulation compliance really makes a lot of sense.”
Uneven adaptation of technology
One of the main issues involving regtech is the uneven adaptation and application of technologies across different companies. This means that ‘one-size-fits-all’ solutions are of no use.
“We interviewed around 60 chief risk officers and chief compliance officers from large banks, and we can see that many of their boards and CEOs increasingly want to adopt AI and automation,” Roy said. “But the degree of maturity between banks varies. You can see a few North American banks and maybe a handful of European banks and East Asian banks leading the way on utilizing AI.”
Roy said that technological advancements come with the possibility of conflict with existing regulations. However, it is important to consider the intent of the user and avoid “blaming the technology,” which is a superficial way of solving problems, he said.
According to Roy, the International Regtech Association is working with a number of regulators to develop responsible Regtech standards. These principles cover governance and control, cybersecurity and stability of technology, outsourcing, risk management, and collaboration and innovation.
“The idea is not to strangle or alienate innovation, but instead promote responsible innovation,” Roy said. “For example, social media can do a lot of good, but if not used properly, it can do a lot of harm. The standards are needed to define the dos and the don’ts,” he said, adding that markets, especially emerging ones such as China and India, need to adopt the products of innovation in a more responsible manner.
This places a lot of responsibility on regulators, as well as regtech companies.
“Regulators need to support innovation, because the financial sector is changing forever,” Roy said. “It’s a chemical change, so to speak. You can’t go back to how it was 10 years ago.”
He highlighted the regulatory systems of the UK and Singapore, where regulators work together with start-ups, IT companies, and financial institutions. These allow companies to experiment, but before they are able to implement the results of their experiments the regulator must give its approval.
Roy also described the regulator’s role as somewhat that of a custodian or a responsible parent.
“As a responsible parent, you need to help your kids grow up as well as learn new skills, accept boundaries, and to go about it without hurting somebody else,” he said.