Collaboration key for RegTech success

RegTech has become an increasingly hot topic in the world of FinTech, and discussions at yesterday's FinTech Industry Sandbox DesignSession were no exception.

The all-day session brought together participants from across the FinTech ecosystem to brainstorm a potential blueprint for an industry-led sandbox. The sandbox, as proposed by the FCA, is intended to improve competition in financial services by making it easier for companies of any size to test out their ideas. Currently in the consultation phase, the sandbox development is led by Innovate Finance together with Hogan Lovells and other members of a working group.

A key piece in the puzzle is facilitating increased collaboration between FinTechs and financial institutions. This includes helping FinTechs to develop and provide, and financial institutions to procure, exciting new RegTech solutions that can improve compliance and outcomes for customers.  

From a regulatory perspective, most RegTechs (as opposed to many other FinTechs) do not need FCA authorisation, and so preparing themselves for an application to the FCA and the realities of being a regulated firm are not usually barriers to entry faced by this segment of the market.

Instead, one barrier for RegTechs is often the difficulty in demonstrating to prospective financial institution clients that they meet the institution's various (and often very complex) procurement requirements, which are driven by the firm's regulatory obligations. Another barrier is caution amongst financial institutions that a new way of carrying out compliance processes will be acceptable to the regulator. For example, before firms can realistically adopt blockchain technology for compliance purposes, there is a clear need to match use cases with an appropriate regulatory framework.   

In these ways, the regulatory environment can, indirectly, create stoppages for RegTechs and for the institutions that could benefit from their offerings.

So what can be done?

Much of the focus yesterday was about how to mitigate these and other issues for the benefit of all stakeholders, without negatively impacting on outcomes for consumers or compliance by institutions.  One of the prevailing themes in the discussions about procurement was the need to make it easier for RegTechs to demonstrate, and for institutions to be satisfied, that a decision to source from a RegTech is appropriate in the context of business need and the solution being adopted.

Some suggested that financial institutions should simply relax their processes to make it easier for them to access innovative products and services. Others felt that RegTechs just had to "take the pain" of procurement as part of the price for playing with the big boys.

The majority view, however, fell somewhere between these two extremes and, as you might expect from an adviser who interacts with both FinTechs and financial institutions on a daily basis, I was with that majority.

Whilst I appreciate that financial institutions are constrained by law and regulation, it seems that there is some work for them to do to remove unnecessary requirements or overly burdensome processes from their procurement policies, in the interests of more agile adoption of solutions. The cost and time it takes an average RegTech to get though a financial institution's procurement process can pose a serious risk that the RegTech runs out of time or money in the meantime.  Banks and others need to be quicker and better at integrating RegTech into their businesses before, as one banker put it to me, the RegTech "goes bust or goes away".  Institutions could also help by being more transparent about what their requirements actually are.     

On the other hand, some RegTechs are unprepared for, and perhaps unrealistic about, the realities of doing business with huge, complex, regulated entities which operate in a heavily scrutinised industry. This was acknowledged by RegTechs themselves, who were keen to explore ways that a sandbox could prepare them for and help them on their procurement journey.  

Could an industry certification programme for FinTechs help RegTechs demonstrate key competencies and controls, to give potential for shorter, more streamlined procurement processes? Or could a more informal framework of guidance and typical requirements allow RegTechs to develop and prepare for procurement in an appropriate way? Could earlier two-way contact between RegTechs and institutions help ease some of the blockages faced by both sides?

Whatever the approach, co-operation and collaboration between RegTechs and financial institutions will be crucial to build such a solution. Seeing yesterday how participants from all parts of the industry freely exchanged ideas and, most importantly, sought to understand each other's points of view, was encouraging. Perhaps this spirit of sharing and understanding is the single most important thing that the industry sandbox can bring to RegTech and FinTech, whatever technical or market issues it seeks to resolve.

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