RegTech: What is the role of the regulator?

I was recently invited to chair a panel at the Global Innovation Institute (GI2) conference in Paris to discuss RegTech policy with a number of regulators. Our discussion revolved around our understanding of what RegTech is, what the role of the regulator is today and what it will be in the coming years. Here, I have outlined some of the key themes from the discussion.

Developing a common understanding and language

We all agreed that RegTech means different things to different people. With new technologies and players entering the market, each with their own classifications and needs, the lack of a common understanding and language around the topic is creating a challenge for regulators.

A key aspect is the distinction between RegTech and SupTech. RegTech refers to use of technology to help private sector companies comply with regulation. SupTech refers to technology that regulators and supervisors use to monitor the market and its players. The two will need to be dealt with, and regulated, differently.

The role of the regulator

Developing a common understanding around RegTech is not limited to its definition. It also includes how it is used, regulated and supported across industries and territories. This in turn will depend on how the role of the regulator evolves in the coming years. And the regulators on my panel have a clear vision of their role in the RegTech transition: act as an enabler while ensuring the stability of the financial system. Considering the speed at which technologies and market participants are evolving, what do regulators need to do to fulfill their role? To answer this question we need to look at the timescale involved.

Creating an enabling RegTech environment

The key priority for regulators now is to create an enabling environment for innovation and promote its adoption across industry.

One aspect is the design of a policy framework and regulation that is compatible with RegTech. This includes measures such as the design of machine readable regulation to help facilitate regulatory reporting requirements. More broadly however, it will require the integration with the wider data economy and related policies.

Another aspect is for regulators to foster collaboration with RegTech companies. Some ways this can be achieved are by providing a safe environment to test new technologies, greenlighting technologies and by helping with regulatory interpretations. This is important to promote RegTech innovation and to provide confidence to financial institutions looking to adopt new and potentially unproven technologies.

As we heard from the regulators on my panel, regulators are already doing much in this field (e.g. hackathons, tech sprints, sandboxes etc.). Despite this, availability of talent / upskilling staff still remains a key challenge for regulators to address.

Transferability and scalability of technologies and solutions is key

In the medium term, regulators need to focus on ensuring transferability and scalability of technologies and solutions to help promote the development of a RegTech economy.

This will require collaboration between regulatory and supervisory authorities, both on national and international level when drafting regulation – not just financial regulation but also regulation around the standards and security of RegTech solutions.

Looking beyond European borders, we can see RegTech capitals developing across the globe: USA, Israel, Singapore and Hong Kong, to name but a few. International collaboration will be key to help RegTech companies develop solutions that are transferable, scalable and internationally applicable. It will moreover help financial institutions meet regulatory requirements across jurisdictions more efficiently.

RegTech system stability

In the long run, regulators need to focus on system stability with RegTech as part of the ‘business as usual’.

This will require the development of standards and the definition of the rules of engagement. With the pace of change and innovation, getting standards right and determining the right rules of engagement will be a challenge for regulators.

At the same time, regulators need to look at how to work with companies that are using RegTech solutions to better understand the financial system and behavior of organisations. Combined with SupTech solutions, regulators should be able to design preemptive and proactive regulation that is targeted at maintaining and improving system stability.

With an unprecedented pace of innovation, a carefully considered long term plan is essential to build a sustained RegTech economy and help countries position themselves on the international market place.

Rav Hayer

Rav Hayer | Banking Data & Analytics Partner, PwC United Kingdom
Profile | Email | +44 (0)7841 468 296

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