RegTech, or technology that enables regulations to be complied with in a cost-effective, efficient and timely manner, is increasingly gaining traction in the financial system. Regulations are becoming all-encompassing, exceedingly complex and demanding – whether in terms of activities (Basel III rollout), or in terms of players (FinTech companies, wallet companies), etc. The increased coverage and complexities have created a potentially vast and evolving market for FinTech companies providing solutions in the areas of compliance, risk management, and regulatory reporting. Artificial intelligence is being applied to areas like event anticipation and even regulation anticipation, along with more “mundane” tasks like fraud management and regulatory reporting. Regulators are adopting, accepting and encouraging these uses of technologies, as exemplified by FCA’s approach towards an active engagement with market participants on this issue.
However, there is an alternative use of this emerging technology that does not appear to be receiving the focus of either the solution providers or the regulators. Even FCA, one of the most progressive and forward-looking regulators, describes RegTech as the “adoption of new technologies to facilitate the delivery of regulatory requirements.” The focus is clearly on the regulated entities being able to ensure improved compliance.
So what is the missing piece? The missing piece is in the use of emerging technologies by regulators themselves, to augment the supervisory processes at their end. It is not just the regulated entities who face the issue of increasingly complex regulations. The regulators face it too. On the other hand, a vast amount of data is being generated by even the routine activities of the regulated entities. Their operations, processes, and products are becoming increasingly complex. In this scenario, regulators need to adopt technology to ensure that they are able to sift through this huge mountain of complex, intertwined, non-transparent data in a timely, effective and efficient manner. The resource constraints faced by regulators are normally much larger than the market players. Technology can help them ensure that their resources are used in the most efficient manner. Regulators have a pressing need to be able to spot a brewing problem before it becomes a systemic issue and causes the next crisis. Technology can make their supervisory processes much more insightful and predictive.
The beauty of the situation is, that the RegTech companies may not even need to tweak their product offerings too much, to make them useful to and implementable by regulators. A slightly changed emphasis and a deeper dive into specific functions may be all that is required to make the products suitable to a regulator. Of course, the next step could be to develop artificial intelligence and data analytics-based tools, to assist regulators in their enhanced focus on macro-regulations and systemic risks.
The question is – will this be a customer-driven market or a supplier-driven market? Who will appreciate this possibility first? Or is it time for the stakeholders to collaborate in this unexplored direction?
Nidhi is especially interested in super-fast payment systems, and loves to bring in a customer’s perspective to all initiatives. She is passionate about revolutionary (and the ‘not-so-revolutionary’) applications of FinTech in the BFSI space.