RegTech: an Invisibility Cloak for Regulation?

Moving onto the second day of the Innovate Finance Global Summit 2017, Hogan Lovells hosted a roundtable focussed on Making Regulation Invisible: Using RegTech to Embed Rules into Workflow. A full house reinforced the nirvana qualities of developing tech which enables operational processes to manage their own compliance requirements. Aspiring to an ultimate destination of a world in which regulations are seamlessly embedded into the workflow of the business and no-one ever needs to look up a rule in a handbook again.

Chaired by Emily Reid, Partner and Head of Commercial & Retail Banking, of Hogan Lovells, the session opened with participants' giving an overview of their company and their interest in RegTech. This revealed a tremendous breadth of perspective in the packed parlour of the Guildhall - both in terms of their role in the FinTech ecosystem, with start-ups, incumbents, trade associations and regulators, and in terms of geography, with regulators from Dubai to Australia represented. The use cases, some in development and others already operational, also represented the breadth of financial services, ranging from data solutions to behavioural analytics to enforcement action analysis. As Emily highlighted, RegTech is as broad as financial services and seems likely to evolve into different elements just as has happened with FinTech.

Regulators' perspectives included the hope that engaging with RegTech can help deal with the vast amount of data being generated by the markets as well as support with identifying emerging systemic risk. It was noted that in Australia the tax office is already working to develop a RegTech solution based on processes which are already reasonably codified in approach. It was generally agreed that the position on the more principles-based aspects of regulation such as "conduct risk", "best execution" or "customer suitability" is more complex and presents greater challenges for turning law into code to underpin RegTech solutions.

Whilst the opportunity for RegTech to create solutions which operate across borders appears huge, the challenge of codifying law is made greater by the complex matrix of regulators and regulation involved. It was commented that in the US alone there are 19 regulators and 50 states and when you take that onto a world stage the complexity multiplies. Different jurisdictions use different technical terms for similar concepts and hope was expressed that RegTech and events such as IFGS2017 could contribute to the growing recognition of the need for regulatory alignment.

One regulator commented that developing completely consistent regulation is unlikely in the short term so differential terms will continue to exist but that there could be greater alignment on common principles. A view was expressed that turning the guidance of law into code rather than APIs can create risk for regulators if confirming "this is what it means to comply" but some are willing to try. Jane Walshe, CEO and co-founder of Enforcd, noted their business is hearing demand for products which allow enforcement judgements in one market to be translated into process learnings for operations in other markets. Interpreting how the different regulatory terms translate into common principles will be key to that and developing a global taxonomy may help support that.  Hope was expressed that global or regional standards could be achieved in KYC.

It is not all about the tech or the reg though. Some of the most significant regulatory breaches, leading to the largest fines for financial firms, have been about human misconduct circumventing systems. Rich Schaberg, a partner from Hogan Lovells' Washington DC office, commented that RegTech solutions offer scope to improve processes rather than creating a perfectly compliant world – a tech solution can mitigate but will not prevent a business head from driving the business in a particular direction. Paul Young of Sybenetix explained how behavioural analytics solutions can help with that mitigation process by equipping the person managing the risk with enriched data about what others are doing.

The phase of development of the user also affected priorities expressed - with a start-up (adopting the tag of "the two-year-old" for the discussion) looking for RegTech solutions which could take the compliance burden off their hands whilst the incumbent (resisting a tag of "the grandmother" in favour of "the teenager") was focussed on improving operational efficiency and securing benefits from enhanced job fulfilment for staff by reducing the process-orientated elements of some roles.

The opportunity for RegTech to contribute to financial inclusion by reducing the operational cost of compliance for start-ups was also outlined by Husayn Kassai from Onfido, commenting that the world is moving online but that regulation is not currently designed for that. Taking a narrow and strict approach to interpreting regulation could help manage risk but there is a huge unbanked population who need access. A balance between compliance (recognising that it also exists to protect the vulnerable) and enabling access will be needed. A cascade for automating decisions could support this so that it is automated where clear and then human judgement is applied where it is more sensitive, for example when assessing the credit rating for people with the same name or living at the same address.

FinTech and RegTech can be forces for democratising financial services. To achieve this the role of regulators will be key – being open and inclusive can accelerate progress and the FCA was commended for achieving this with its regulatory sandbox.

As Emily commented, "RegTech is a great way for companies to get involved in the FinTech ecosystem, as developers will not generally need to be regulated, just ensure that the solution delivers the regulation accurately".

The market demand is clear so roll on RegTech…

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