reconceptualization of financial regulations

New Report — FinTech, RegTech and the Reconceptualization of Financial Regulation — proposes reforms to how regulators oversee financial industries.

The end is near, according to every doomsday advocate, ever. In 2008, it actually was; a total financial collapse was only hours away before unprecedented action by the US Treasury.

After the dust settled, regulators knew that they had to tighten the restrictions on financial institutions (FIs). Since then, new laws have been enacted, over $235 billion in fines levied, and rigorous compliance procedures are increasing the breadth and depth of data reporting, aggregation, and analysis.

Luckily, for banks’ bottom lines and for customers wanting quick onboarding, there is new technology for digitizing manual reporting and compliance processes. These new regulatory technologies (RegTech) ease the burden of compliance and lowers operational costs. Instead of hiring 8,000 new compliance employees (like JP Morgan) to manage the paperwork, forward-thinking FIs are taking advantage of automation and algorithms to process compliance information faster and more accurately.

Examining of the need for RegTech, where the field is now, and where it should go is the subject of a new report: RegTech and the Reconceptualization of Financial Regulation (October 1, 2016), published by Northwestern Journal of International Law & Business.

RegTech for Regulators

RegTech is not only good for FIs, but also the regulators themselves. Financial evolution is bringing about whole new areas of regulatory concerns; from new financial instruments to complex multi-party international transactions, how can risk and fraud be managed both in-house and for the whole financial system? More complex regulatory requirements imply more data to check, more information to analyze. If the regulators can’t analyze what they are asking for, why ask for it in the first place?

The report calls for a new way to FIs and regulators to work together, using the power of RegTech: “it has the potential to enable a close to real-time and proportionate regulatory regime that identifies and addresses risk while also facilitating far more efficient regulatory compliance.”

Instead of analyzing transactions and situations after the fact, RegTech can enable the monitoring of new financial innovations almost as they happen. The FIs can continue to focus on innovation and reduce concerns over compliance, as they are working more closely together. Regulators get a quicker handle on the state of the market and can more effectively steer the market away from undue risk.

The report suggests various systems to help create the new RegTech possibilities, including:

  • Regulatory policy modeling
  • Develop common compliance tagging and reporting standards
  • Develop a range of mathematical techniques to assess risk
  • Integration of national and global financial monitoring systems
  • Develop a suite of open-source compliance tools
  • Encourage collaborations and selected data sharing between different international regulators

The report also looks at technologies that might be fundamental building blocks for the new RegTech:

  • Blockchain-based systems for clearing and settlement of foreign exchange transactions.
  • India Stack, a four-tier technology stack that broadens access and open innovation in India’s financial services industry.
  • Regulatory Sandbox wherein businesses can test innovative financial products, services, business models and delivery mechanisms on a small-scale without fearing the wrath of regulators

Beyond systems and technologies, the report calls for a new model for compliance: know your data. One of the guiding philosophies of current compliance is know your customer; to prevent money laundering and financial crimes, you need to know who you are dealing with.

Know Your Data

To take compliance to the next step then, is about knowing the data associated with the various accounts, transactions, and systems. What data supports an accounts identity? What data surrounds the various transaction of an account? What data connects that transaction to other accounts? What is the data that relates different risk profiles, and different modelling assumptions or scenarios?

Having abundant, accurate data, which flows quickly between the FIs and the regulators is a RegTech dream scenario. Focusing on data and how to improve its creation, tracking, sharing, combination, reporting and analysis offers a clear way forward for RegTech. Hopefully, all parties can see the advantages of implementing the next generation of RegTech and avert any future financial collapses before they even start.