RegTech: Big Bang or Slow Burn?

Will RegTech be a "Big Bang" or a "Slow Burn"? This was the question posed at the end of another roundtable on RegTech chaired by Emily Reid, Partner and Head of Commercial and Retail Banking at Hogan Lovells.  The consensus was "Slow Burn" reflecting a number of themes highlighted in our preceding debate on RegTech at the Innovate Finance Global Summit.  So why Slow Burn?

It was clear from the range of participants that RegTech is an area of interest to a wide range of firms – FinTech start-ups, global financial institutions, regulators, academics, lawyers, consultants as well as those actively offering and developing RegTech solutions and many of those present at the roundtable are actively exploring potential opportunities and use cases.

Factors which point towards the incremental adoption of RegTech solutions include:

  • Legacy Systems: Whilst larger institutions are seeking to improve legacy systems integrating RegTech is challenging.  Incurring potentially heavy costs of integrating RegTech solutions and reducing on-going costs (and potential liabilities) has to be balanced with the need for shareholder return.
  • Compliance buy-in: RegTech is by definition designed to reduce the costs of compliance – selling a solution to the person whose job may be changed – or even displaced - by the solution can be a difficult "sell".
  • Critical mass: FinTech companies will be attracted to tried and tested solutions. Adopting a solution which is being used by others in the sector is less risky than taking a chance on a new entrant with little or no track record, even if the product being offered appears more attractive.
  • Established regulatory frameworks: Regulators in developed markets can face challenges in the same way as large financial institutions – adapting existing rules, authorisation and supervision tools can be problematic.
  • Understanding the rules: Issues of interpretation arise on a daily basis – this may be as a result of implementing EU law which is not necessarily drafted in "plain English" or just the challenge of writing rules which are intended to be "technology neutral" – developing AI which can solve the interpretational issues is still someway off (hopefully for lawyers!)

 

So what are the positives?

 

  • Focus on what can be done: RegTech naturally lends itself to certain compliance areas – KYC, reporting, change control, identifying and sharing key information.  Building, testing and integrating solutions in focused areas will build confidence and lead to incremental adoption of RegTech solutions.
  • The blank canvass: Regulators in countries seeking to introduce financial regulation for the first time are likely to be keen to integrate new solutions into their regulatory frameworks – perhaps acting in conjunction with regulators from more established jurisdictions who can add their experience to testing the effectiveness of the solution.
  • Working together: There is an opportunity for financial institutions, regulators and RegTech providers to work collaboratively to develop solutions which save time and costs whilst still resulting in effective supervision.
Although the consensus was for slow burn it is evident from the increased focus on this area that this may be a little too cautious.  To take the fire analogy further – the kindling appears to be lit and it may not be too long before the logs catch fire!

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