Tech Set to Play Bigger Part of Future Regulation, Academic Report Finds

Banks stand to benefit from considerable cost savings and from the automation of compliance tasks in the years ahead, as markets and regulators continue to embrace FinTech developments, according to a report.

A unique combination of technological developments in emerging markets and the active stance which most regulators have adopted toward FinTech, such as developing "regulatory sandboxes", may help ease the transition from existing regulatory regimes to ones that are much more efficient and tech-intensive, said the report, produced by the University of Hong Kong.

The report said technology would play an important part in banks' compliance efforts through "the nexus between regulation, data and digital identity". 

"Regulation today is benefiting from the automation of reporting and compliance processes. This trend is beginning to enable substantial cost savings for industry and superior monitoring by regulators, such that the early signs of real-time and proportionate regulatory regimes that identify risks and enable more efficient regulatory compliance are beginning to emerge," it said.

RegTech: A Financial Regulator's Most Valuable Tool?

RegTech is typically defined as the use of technology in regulatory monitoring, reporting and compliance. For policymakers and supervisors, the challenge of having to regulate rapidly transforming financial systems increasingly requires the use of, and reliance on, RegTech.

The paper said RegTech looked set to become a financial regulator's most valuable tool in future, providing more efficient ways to ensure financial stability, prudential safety and soundness, consumer protection and market integrity, encouraging competition and assisting the development of products and services. 

"The evolution of RegTech in the financial industry … highlights the rate of change within the industry itself. However, the regulators themselves provide an example of the gap between information technology-enabled systems in the industry and the lack of IT-enabled solutions among regulators," the report said. 

"This gap, now quite wide, is one of which regulators are beginning to become increasingly aware due to the simple necessity of dealing with the masses of reports and data which, post-global financial crisis, regulatory changes have required industry to deliver to them."

The report said as these data streams were designed to ensure financial stability and market integrity, it was essential for regulators to develop systems to monitor and analyse such data sets appropriately.

KYC and AML Uses

So far, RegTech applications have focused on the digitisation and streamlining of existing manual reporting and compliance processes, mainly in the context of know your customer ("KYC") and anti-money laundering ("AML") requirements. The report said although this had led to substantial cost savings for both financial services providers and regulators, RegTech had the potential to enable a close to real-time and proportionate regime that identified and addressed risk while also facilitating far more efficient regulatory compliance.

The report said financial regulation was a product of its own history and of the market within which it had operated, and developments such as blockchain challenged the status quo so fundamentally that many aspects of regulation might need re-evaluation.

"Prudential regulation will focus on algorithm compliance and financial stability will also be concerned with financial and information networks," it said. 

"The emergence of FinTech companies, combined with the wider use of regulatory sandboxes, offers a unique opportunity to pilot this novel kind of regulatory architecture that is proportionate, efficient and data-driven before market-wide implementation. FinTech requires RegTech." 

The report said the main task for regulators was to implement, rethink and test the boundaries of RegTech to see whether it could be applied to an even wider range of processes and functions: "The challenge for regulators globally will be 'to boldly go where no man has gone before' to conceptualise and implement the possibilities of RegTech." 

Professor Douglas Arner, co-founder of HKU's Asian Institute of International Financial Law, Janos Barberis, founder of FinTech HK, and Professor Ross Buckley of the Centre for Law, Markets and Regulation in New South Wales, Australia, were the co-authors of the paper.

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Ajay Shamdasani is a senior staff writer with Thomson Reuters Regulatory Intelligence in Hong Kong. He covers regulatory developments in Hong Kong, India and South Korea. He also writes about money laundering, fraud, corruption, data privacy and cybercrime.