Ask anyone on the street whether they know about FinTech and you’re likely to be met with a resounding yes. The same cannot, unfortunately, be said for RegTech.
RegTech (Regulatory Technology) was
defined by the UK’s Financial Conduct Authority(FCA) as “a subset of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.” In the same document, the regulator also spoke of its intention to support the development of digital regulatory solutions.
In a recent survey, we posed the question of whether financial regulators should promote the adoption of RegTech solutions by financial institutions. The majority of industry respondents expressed a belief that regulators should encourage and support the proliferation of RegTech solutions, but views on how this should be done were mixed.
Here we unpack the findings of our survey, and consider how regulators should approach the fast-emerging area of Regulatory Technology.
Why RegTech is Important
Whichever way you look at it, RegTech is an inescapable part of the modern financial landscape. It’s used to monitor trading, prevent market abuse, and comply with reporting obligations. RegTech is also often conflated with SupTech (Supervisory Technology) that is used by regulators to supervise the markets and their participants.
Although RegTech is widely misunderstood, it is an essential component of compliance across global financial markets. Financial services have expanded at an astonishing rate over the past decade, and internet trading platforms have democratised the trading of stocks and other key instruments. In the UK alone, one trading platform saw
85 million customer trades placed during 2020– up 142% from the previous year.
For each trade, a variety of metrics must be tested and these could give rise to reporting obligations both on a domestic and international level. This explosion in market involvement has significantly increased the compliance burden on trading platforms and public companies alike.
With market participation only set to rise, it has become increasingly clear that existing means of handling trade monitoring and reporting are insufficient. RegTech fills that gap, and can meet regulatory compliance obligations at speed and scale.
The Current Approach of Regulators
Despite the FCA’s positive view of RegTech solutions, its current approach is somewhat reactive. It has long been the position of the UK authorities that ‘management-based’ regulation is the most effective way to handle the markets. This means that “regulators do no prescribe how regulatees should comply, but require them to develop their own systems for compliance and demonstrate that type of compliance to the regulator.”
This ethos has led to a patchwork of regulatory standards and methods that leave the FCA and the Prudential Regulation Authority (PRA) with a substantial workload. Some platforms, trade venues, and companies have led the way with increasingly sophisticated RegTech solutions, while others remain much closer to their manual reporting roots.
While it is only right that the regulators remain ‘technologically-neutral’ and avoid championing one digital solution over another, it seems that they are also undergoing a cultural shift. In a
2019 speech, the FCA’s Director of Innovation, Nick Cook, said that “data and technology are changing the way we regulate” and suggested that the industry authority was working towards a future where innovative thinking becomes part of ‘business as usual’.
Views on RegTech – eflow’s 2021 Survey
Seeking to promote an open dialogue around the future of the industry, we gathered feedback from industry figures on the need for financial regulators to encourage the adoption of RegTech solutions by financial institutions.
Ask anyone on the street whether they know about FinTech and you’re likely to be met with a resounding yes. The same cannot, unfortunately, be said for RegTech.
RegTech (Regulatory Technology) was defined by the UK’s Financial Conduct Authority (FCA) as “a subset of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.” In the same document, the regulator also spoke of its intention to support the development of digital regulatory solutions.
In a recent survey, we posed the question of whether financial regulators should promote the adoption of RegTech solutions by financial institutions. The majority of industry respondents expressed a belief that regulators should encourage and support the proliferation of RegTech solutions, but views on how this should be done were mixed.
Here we unpack the findings of our survey, and consider how regulators should approach the fast-emerging area of Regulatory Technology. Why RegTech is Important
Whichever way you look at it, RegTech is an inescapable part of the modern financial landscape. It’s used to monitor trading, prevent market abuse, and comply with reporting obligations. RegTech is also often conflated with SupTech (Supervisory Technology) that is used by regulators to supervise the markets and their participants.
Although RegTech is widely misunderstood, it is an essential component of compliance across global financial markets. Financial services have expanded at an astonishing rate over the past decade, and internet trading platforms have democratised the trading of stocks and other key instruments. In the UK alone, one trading platform saw 85 million customer trades placed during 2020 – up 142% from the previous year.
For each trade, a variety of metrics must be tested and these could give rise to reporting obligations both on a domestic and international level. This explosion in market involvement has significantly increased the compliance burden on trading platforms and public companies alike.
With market participation only set to rise, it has become increasingly clear that existing means of handling trade monitoring and reporting are insufficient. RegTech fills that gap, and can meet regulatory compliance obligations at speed and scale. The Current Approach of Regulators
Despite the FCA’s positive view of RegTech solutions, its current approach is somewhat reactive. It has long been the position of the UK authorities that ‘management-based’ regulation is the most effective way to handle the markets. This means that “regulators do no prescribe how regulatees should comply, but require them to develop their own systems for compliance and demonstrate that type of compliance to the regulator.”
This ethos has led to a patchwork of regulatory standards and methods that leave the FCA and the Prudential Regulation Authority (PRA) with a substantial workload. Some platforms, trade venues, and companies have led the way with increasingly sophisticated RegTech solutions, while others remain much closer to their manual reporting roots.
While it is only right that the regulators remain ‘technologically-neutral’ and avoid championing one digital solution over another, it seems that they are also undergoing a cultural shift. In a 2019 speech, the FCA’s Director of Innovation, Nick Cook, said that “data and technology are changing the way we regulate” and suggested that the industry authority was working towards a future where innovative thinking becomes part of ‘business as usual’. Views on RegTech – eflow’s 2021 Survey
Seeking to promote an open dialogue around the future of the industry, we gathered feedback from industry figures on the need for financial regulators to encourage the adoption of RegTech solutions by financial institutions.
While the majority of respondents were resolute in their belief that regulators do bear some responsibility for the future of RegTech, these views were qualified by several key arguments.
Many respondents believed that the FCA and other regulatory bodies should be overtly pro-technology, and that they should lead by example. These views were tempered, however, by the near-unanimous belief that the authorities must remain neutral and should not champion individual solutions, products, or providers.
A number of respondents also raised the issue of knowledge and education. It is perhaps not surprising that few people have a detailed understanding of what RegTech has to offer, and a variety of labels including TaxTech, LegalTech and others are captured by the overarching term. This complicates the argument and makes it harder for institutions to ‘sell’ RegTech adoption to stakeholders.
Finally, participants drew a key distinction between promoting RegTech and promoting better systems and controls more generally. Many solutions have already received informal appreciation and recognition from regulators, and this in itself could be viewed as a promotion to financial institutions who seek out credible providers.
What Next for RegTech?
Both technology and financial regulation are areas of constant change, and it is very difficult to predict the direction they might take in the coming months and years.
In a recent report prepared by
RegTech Associatesand commissioned by the City of London, a compelling case was made for faster adoption of digital regulatory solutions. The report argues that policymakers should focus on building awareness of the benefits of RegTech, adopting tech themselves to advocate for improved standards, and establishing a collective voice for the industry.
These recommendations are reflective of the industry trends that we see day in, day out. They also speak directly to the concerns raised by some of the participants in eflow’s survey. By establishing a coherent voice for RegTech providers and advocates, regulators can improve the market’s understanding of the solutions available, and drive digital adoption without favouring certain providers over others.
Preparing for the Future of Financial Regulation
In the coming years, RegTech is set to become an increasingly crucial component of the financial regulation sphere. Just as was the case for FinTech before it, RegTech must first face an uphill battle in educating regulators and institutions of its merits while continuing to improve monitoring and reporting processes across the board.
While it may seem far off now, there is scope to suggest that the term RegTech (and indeed FinTech) will one day become obsolete. There will come a time when everything is powered by technology, and so the label will no longer be necessary.
Until then, it falls to regulators, providers, and institutions to move towards faster and more effective ways of satisfying compliance obligations. With a full complement of transaction reporting, trade surveillance, transaction cost analysis and trade life-cycle management solutions, eflow’s flagship TZ software could help your business to get ahead of the curve.
For more information, book a demo or contact eflow today.
*This article is provided for informational purposes only and should not be relied upon as legal or financial advice. Its contents are current at the date of publication and do not necessarily reflect the present state of the law.
