2017 saw significant developments in financial and regulatory technological innovation – and many regulators have been moving in parallel. What is going on?
In a nutshell, the global collaborative fabric is coming together. Of course, the landscape for global collaboration is by its very nature a patchwork that reflects differing policy objectives across the globe. Regardless, it is now possible to see RegTech activity focused on all three fundamental objectives for regulators which explore RegTech: protecting the system and consumer whilst, at the same time, promoting growth and innovation.
As we have long argued on these pages, collaboration is necessary to overcome the many barriers to RegTech adoption. We applaud the many forms of regulatory collaboration going on across the globe and are looking forward to discussing the road ahead at our conference on 7 March. No doubt we will be covering those that are setting the pace, those that are starting to make their moves now, and those who have yet to put their collaborative plans into action.
So, to get this year’s conference off on the right footing, we have surveyed the global landscape and assembled the composite view of the industry’s efforts.
The breadth of global efforts is actually quite impressive. In our research this quarter we have found RegTech collaboration involving regulators:
- ‘modernising’ regulatory rulebooks
- digitally filtering and routing regulations
- interpreting/providing advice on regulatory obligations
- regulatory reporting and domain modelling
- Know Your Client (KYC)/due diligence processes
- algorithmic trading
Clearly, not all regulators are active in these areas, but it is an impressive start. Who is leading? Who is following? Where are we going? All great questions to which there are no clear answers at this stage.
Being first out of the blocks does not always mean winning the race. We have looked at what some of the pioneers are up to:
Throughout 2017, UK financial regulators were involved in numerous industry collaborations which have attempted to deliver technological solutions for specific regulatory issues that have existed and have been accepted for years. There are 10 RegTech projects in the FCA work programme – some of which also involve the Bank of England. One of the main collaborative projects launched by UK regulators was the FCA Techsprint which took place in November. The aim of the sprint was to use RegTech to prove the regulatory reporting burden for firms could be reduced by automating the interpretation process. Other efforts include handbook upgrades, supporting standards efforts and automating regulatory advice. Alongside these efforts, the FCA are also supporting the development of regional FinTech hubs across the UK. Such collaborative efforts allow UK regulators to offer a degree of regulatory oversight and support for financial firms and technological innovators to test theories and concepts within a “safe space” before they fully enter the financial services market.
Successes in collaborative efforts have also been made elsewhere. In Singapore, the Monetary Authority of Singapore (MAS) has teamed up with the Massachusetts Institute for Technology’s (MIT) Media Lab in an attempt to drive innovation. Through this collaborative effort, industry professionals based in Singapore are working with researchers at MIT to develop and investigate experimental use-cases within the RegTech sphere. One particular focus thus far has been an investigation into using Distributed Ledger Technology (DLT) to develop prototypes in relation to interbank payments, securities settlement, insurance claims processing, trade, and trade finance. The MAS has indicated that it sees the value in collaborating with academic institutions such as MIT as it ‘can provide unbiased evaluation and feedback and help bring about further innovation’.
In September 2017, the Australian Insurance and Investment Commissions (ASIC) held a showcase event that looked to explore the ways in which RegTech solutions can be further developed and utilised to stimulate engagement and innovation within the industry. The showcase brought together regulators, RegTech developers, financial firms, and academics to explore two specific RegTech topics. Firstly; how RegTech can be used to provide more efficient access to regulatory information for reporting purposes, and secondly; how software and algorithms can help firms to meet more efficiently their regulatory obligations. Both streams related to the regulatory framework administered by ASIC, as well as other frameworks also.
Efforts such as the showcase demonstrate that regulators are in a strong position to facilitate collaboration within the industry, and thereby drive the impetus to produce real change when it comes to the way compliance is achieved. They also demonstrate how financial firms are open to doing things differently, and the benefits that are available to the industry when this is the case.
Starting to move
Clear RegTech intentions are starting to emerge in a number of jurisdictions including:
The United States
Regulators in places such as the UK, Singapore and Australia suffer very few limitations in terms of their ability to facilitate and participate in industry collaboration. This is not the case, however, for the United States where, despite progress having been made, regulators have not yet taken the collaborative process as far as their UK counterparts.
As yet, there have not been any formal sandboxes set up by U.S. regulators, although some authorities have encouraged RegTech innovation through other, more isolated, initiatives. In 2017, for example, the CFTC showed its openness to technological innovation by allowing bitcoin futures to be traded, whilst not necessarily endorsing cryptocurrencies themselves. In addition to this, the CFTC set up their own initiative called LabCFTC. Unlike the collaborative processes in the UK, LabCFTC does not offer a regulatory structure for innovation. Instead, it provides a forum for RegTech and FinTech firms to discuss their efforts with specialists from the CFTC, and for industry experts to collaborate on technological developments.
There are two key obstacles that are currently preventing the U.S. authorities from collaborating on a similar scale to the UK and elsewhere. The first is the complex nature of the U.S. regulatory framework. There are currently five federal agencies which are directly responsible for the regulation of financial institutions within the U.S., including the CFTC, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). In addition to federal authorities, there are a number of banking agencies and state regulators that oversee banks and nonbank financial companies. There is currently no federal licensing authority for nonbanks, which means nonbank FinTech companies wanting to reach a national scale must undertake the costly and lengthy process of applying for licenses in every individual state. Whilst this decentralised system can offer the potential for collaborative efforts to develop RegTech, such as allowing the various authorities to act in themselves as laboratories for technological innovation, the fragmented nature of the system inevitably hinders the development of a consistent approach across the industry.
The second obstacle is litigation. If a U.S. regulatory authority were to facilitate a sandbox, there is no certainty that participants would be shielded from consumer class action litigation. This serves to undermine the level of trust between participants who may wish to collaborate together, and this in turn impedes innovation of new concepts and ideas in the U.S. RegTech space. If these issues are not tackled, innovation with regards to regulatory technology in the U.S. will continue to lag behind the efforts being made in Europe and elsewhere.
In Canada, collaborative developments have also been made, but in a limited capacity. Canada is currently emerging as a global leader in the RegTech space, with its RegTech economy set to be valued at $106 billion by 2020. Whilst private firms remain the main drivers of innovation, the Canadian government is attempting to play, to an extent, a key role in pushing this growth by adopting the development of RegTech as one of its priorities.
Using initiatives at the federal, provincial and municipal levels, the Canadian government has focused on key areas of RegTech innovation such as artificial intelligence, big data, and cybersecurity. To facilitate this growth in RegTech, Canadian regulators have involved themselves in various industry collaborations. In 2016, the Ontario Securities Commission (OSC) held a “RegTech hackathon”, bringing together firms and RegTech developers to tackle problems related to Know Your Client (KYC), identity authentication, financial literacy, and transparency in capital markets. Building on this, in 2017 the OSC was the first of the Canadian securities regulators to introduce an innovation support unit, the OSC LaunchPad, with the aim to work with innovative firms to further develop RegTech, and in February 2017, Canada also launched its first ever sandbox. Unlike in the UK, the Canadian authorities are not themselves driving innovation. Instead, the main aim of these collaborative efforts is to provide the RegTech sphere with a positive environment so as to allow private firms to drive technological developments.
In the Middle East, Abu Dhabi Global Market (ADGM), the international financial centre in the UAE, announced in October 2017 the launch of its FinTech Innovation Centre. The aim of this initiative is to support financial innovation, cultivate developments in the RegTech and FinTech spaces, and foster closer industry collaboration. This collaboration aims to provide an environment for technological developers to engage and coordinate their innovative efforts, thereby enabling the opportunity for RegTech and FinTech startups to further develop regulatory solutions. The Centre will also host a Regulatory Laboratory (RegLab) which is essentially a sandbox aimed at allowing companies to test innovative products in collaboration with the regulator.
Lagging the pack
By definition, there are lots of regulators that should be in this section, but we looked at a couple of key financial centres to give a flavour of what they are up to:
In Europe, the collaborative approach being taken by regulators is more hands-off. The European Securities and Markets Authority (ESMA), responsible for ensuring a coordinated approach to regulating new or innovative financial activities in the securities markets, is very much adopting a limited approach when it comes to collaboration. That being said, efforts are being made. Thus far, ESMA has developed a framework to track, analyse and monitor innovation and its impact on markets, outlined in its recently published 2018 Supervisory Convergence Work Programme. This document details the areas of RegTech innovation which ESMA recognises as the key drivers, which includes monitoring advances in innovation in relation to Distributed Ledger Technology and Initial Coin Offerings (ICOs). Where ESMA has acted as a facilitator, albeit in a limited capacity, is its effort to encourage firms to digitalise their data systems to ensure that the data is transmitted in a digital format that can be easily processed and analysed. What this approach is lacking, however, is a coordinating role with the aim of bringing together regulators and financial firms operating within the EU. The main restriction causing European authorities to adopt such a limited approach is that they currently lack the budgetary scope for facilitating collaboration on the scale that we are seeing in the UK. Whilst ESMA, along with other European regulatory authorities such as the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA), are allocating resources towards developing RegTech, they are often inconsistent in their approach.
This is also the case in China, where collaboration is mainly occurring between FinTech and RegTech firms. RegTech developments in China are dependent on how the Chinese government issues regulation in a way that is more open to RegTech. An example of this is the People’s Bank of China’s (PBOC) efforts to conduct its own trial runs of its prototype cryptocurrency. Currently, however, Chinese regulators are lacking the political will to embrace the new Regulatory technologies that are being developed.
At some stage, the RegTech regulatory marketplace will join up more formally. So what is going on globally?
Global collaborative efforts – the FSB
The Financial Stability Board (FSB) is one organisation that recognises the need for global collaboration in terms of developments in RegTech. In collaboration with other international organisations via its Financial Innovation Network, the FSB has monitored how innovations in RegTech and FinTech across the globe can enable developments in financial services that could result in new business models, applications, processes and products that have positive effects on financial stability. The development areas that are being studied by the FSB include FinTech credit, digital currencies, distributed ledger technology (DLT), artificial intelligence and machine learning. The FSB’s collaboration has produced a better understanding of the benefits and risks that RegTech can pose and has generated strong dialogue between regulators, private firms and academic stakeholders across the globe.
The need for a global focus
The ultimate aim for regulators should be to facilitate collaboration between the public and private sectors to ensure convergence between the leaders and followers within the global financial community in terms of the pace at which technological innovations are being implemented. Divergence in approaches will eventually hinder collaborative developments, creating separate, siloed regulatory models that are specific to each region or authority. Only with the existence of stakeholder collectives will RegTech solutions that benefit the entire industry materialise.
An example of one such collective is the RegTech Council (RTC). Launched in the UK in February 2017, the RTC consists of over 170 individuals from 90 institutions, with equal participation from financial institutions, technology companies and regulators. Currently, there is no “safe place” where regulators, financial firms and tech firms can collaborate to develop solutions to the challenges being faced by the industry. The RTC creates a platform that bridges the gap between regulators, firms, academia and the wider financial and technology markets, thereby facilitating collaboration with the ultimate aim of adopting one, single, comprehensive regulatory model.
The findings of this research will be discussed further by a panel of industry experts at our annual RegTech conference on 7 March 2018. If you would be interested in attending then please register at the following website: http://regtechconference.co.uk/registration. Also, feel free to get in touch via email if you feel your regulator has been left off the list or you have perspectives to add!
 The FCA Techsprint was hosted by Hitachi. A video demonstrating the event can be viewed at the following link: https://vimeo.com/250619433