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Regtech report encourages regulators to innovate and US to participate more in fintech-aided compliance

By dailymail / Published on Monday, 26 Jun 2017 16:56 PM / No Comments


A new whitepaper from Innovate Finance’s Transatlantic Policy Working Group (TPWG) has recommended that regulators in the U.S. do more to encourage financial technology (fintech) innovation in the regulatory field (regtech) by liaising with their international counterparts more and adopting a national policy that conforms with global norms.

The TPWG was formed earlier in the year with law firm Hogan Lovells to try to foster increased cooperation between the U.S. and U.K. over global rules governing the fintech sector. It includes U.S. fintech companies and invites U.S. authorities to participate.

The U.S. is still debating whether fintech innovation, including in the regtech area, should be enabled on the State or Federal level of government.

The sub-set regtech arena that TPWG wants to boost is mainly focused on ‘process automation’ at present, such as improving inefficiencies within banks’ regulatory reporting procedures by using cheaper, shared utilities for Know Your Customer (KYC), tax or common sanctions reporting. The aim is to use technology to ease the burden of compliance on financial institutions (FIs). This segment of the market existed before the regtech phrase was coined and is long established.

However, the report entitled the Future of RegTech for Regulators, Adopting a Holistic Approach for the Digital Era Regulator argues that more can be done to encourage the use of regtech to transform markets and to harness technology in order to help regulators encourage more competition.

Regtech could also make it easier for regulators to receive stress tests and other filings necessary under tightened post-crash rules such as the Basel III capital adequacy reporting regime.

This regtech for regulators area is underdeveloped at the moment in the opinion of TPWG and could offer a future growth area. It would also help FIs find new, more convenient and cheaper ways to report to regulators.

These drivers for the regtech field, an increasingly prevalent sub-set of the fintech marketplace, are global in nature but the TPWG wants to ensure the supporting ecosystem is similarly global and joined-up allowing fintechs to export their solutions around the world more easily. At the least enhanced co-operation between the U.S., U.K. and EU should provide a clear pathway to implementing any necessary local amendments and make it clear which body can help entrepreneurs bring new solutions to market.

The TPWG report unveiled in Washington, D.C., on 23 June also recommends a three-pronged approach that actively helps entrepreneurs via sandboxes, where new business models and technologies can be experimented within a safe environment; a willingness to listen to rule and process changes that could aid the development of blockchain and other coming technologies; and an openness to allowing fintechs to refresh the Digital Financial Infrastructure (DFI) that is used by banks to settle payments, clear securities and submit their Basel III capital adequacy regime liquidity reports.

The regtech framework advocated by TPWG can be summarized as three broad approaches that can be adopted singularly or collectively to help regulators encourage more digital reporting, competition and innovation:

  • Ecosystem support – Governments should engage more with industry via bodies such as the LabCFTC in the U.S. and the U.K. Financial Conduct Authority’s (FCA) regulatory accelerator in order to help identify new technology and market developments and encourage cross-border liaison. This will allow regulators to work closely with technology innovators and understand any process and regulatory infrastructure adjustments that may be necessary to get to market.
  • Digital Financial Infrastructure (DFI) – Implementing new technologies, such as real- time reporting; shared utilities; or application programming interface (API) architectures that can be easily accessed by all, can help facilitate innovation. APIs should also streamline the way that banks can develop and submit applications for new products, settle payments, clear securities, report compliance and so on.
  • Rule and Process Changes – Implementing new rules and processes to encourage and allow innovative solutions to be tried out on regulatory compliance procedures would be beneficial for the regulator, in terms of digesting the data flowing into it, and the industry in regard to having a template that helps internal efficiencies. This could include defining new regulation in a machine-readable format, for instance, so that it can be applied automatically. Alternatively, a regulator’s handbook could be adjusted to accommodate the application of new technology such as blockchain compatible data protection or identity rules.

Commenting in a statement released with the report, Daniel Morgan, director of policy and regulation at Innovate Finance, claimed that: “The second wave of [regtech] systems will fundamentally reduce the cost and burden of regulation and require a radical rethink of regulatory processes.”

His boss, Lawrence Wintermeyer, CEO of Innovate Finance, warned “this future is some years from becoming reality” and that it is achievable “only by pursuing a holistic approach to technology-enabled regulation”. He added that regulators need to start to reimagine rules and processes to make them “fit for a digital age”.

Richard Schaberg, a partner at law firm Hogan Lovells and head of its U.S. Financial Institutions Practice Group, said in the same statement that: “Fintech, regtech and innovation, generally, have the potential to radically transform the U.S. and global financial systems.”

“U.S. regulators have, so far however, remained more cautious than some of their international counterparts in embracing technological innovation in financial regulation. The TPWG report provides insight into the international efforts to encourage and deploy new ideas and techniques for regulatory compliance and outlines the steps the U.S. can take to fully integrate the evolving and essential features of regtech into our own systems.”

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