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RegTech for Regulators

R&R: RegTech for Regulators – Developing a New Financial Regulatory Framework

RegTech for Regulators

RegTech is hot; financial institutions and regulated businesses that want to streamline their compliance processes have already implemented RegTech solutions or plan to do so in the near future. However, they’re not the only ones interested in reducing paperwork, speeding up workflows and cutting costs. Regulators themselves are also looking at adopting RegTech solutions to improve compliance requirements and acceptance throughout regulated industries.

One report that looks at how regulators are approaching RegTech, the issues and progress they’ve experienced, and plans for the future is The Future of RegTech for Regulators. It considers “how RegTech can be adopted and integrated into the financial regulatory framework in order to provide more efficient, flexible, and accurate data to ensure the compliance of regulated entities and the safety and soundness and stability of the US and global financial systems.”

RegTech in the US

While the report does look at a variety of countries, the emphasis is placed on the US. With all the different levels and branches of government, and the numerous regulatory bodies, the US is one of the most complex regulatory regimes in the world, or, as the Organisation for Economic Co-operation and Development (OECD) states, “comparative studies of the American system find more complex, detailed and inflexible regulations than those in other OECD countries.”

To illustrate the point, here’s a diagram to show some of the overlapping regulators and the type of regulated entities they cover.

US Regulatory Structure

The report notes a substantial difference between State and Federal governments on their approach to regulating fintechs. While the Feds have announced programs to encourage fintechs, “it remains to be seen whether these efforts will have a demonstrable effect on the growth of fintech in the US given the lack of coordination among the regulators.”

Many States, meanwhile, have jumped with licensing schemes that are more amendable to the requirements of the new industry. They see opportunities to become a leader in new, valuable high-tech financial businesses, as well as generate new revenue streams. They have gone so far as to sue the OCC and its proposed fintech charter.

Process Automation

While those rules get sorted out, there are many other areas that RegTech solutions are impacting. The most noticeable area is the application of technologies that are being used by companies and implementing them for regulators. Process automation — converting traditional paper-based processes to digital, automated systems — provides efficiencies for both the regulated and regulators. Adoption of these cost and time saving techniques would speed the flow of compliance information, reduce errors and allow both to focus on more complex cases, rather than simple record-keeping and reporting.

Beyond this, there’s an opportunity to change how compliance works. Reworking systems to take advantage of new technology can develop a whole, new Digital Financial Infrastructure (DFI).

One example, is reporting to the SEC, a requirement of all Public companies. Instead of transferring documents between the company, accountants, lawyers, and the SEC (often multiple-times), a system that focuses on data requirements (not forms) “has the potential to significantly simplify reporting obligations.”

The Future of RegTech

Taking an even more holistic view of how compliance works, creating rule changes that start with RegTech and extending the regulations to fit the possibilities is the path forward for a long-term strategy. RegTech, in this scenario, is not simply helping to fulfill requirements, or improving systems, but is fundamentally changing the regulatory framework.

There’s always a connection between regulations and technology; as technology advances, the types and forms of compliance that are possible also advances. However, while technology speeds ahead, regulations change slowly, and there is tendency to use yesterday’s rules on tomorrow’s technology.

Going forward, this hampers innovation, increases risk and adds unnecessary costs and delays to compliance. However, applying a new approach that considers the benefits of RegTech and how to best implement regulatory change can, alternatively, promote innovation, decrease risk and improve efficiencies.

For example, “if Congress delegated more authority to review and revise the rules and regulations under each regulators’ purview, the regulators could more easily revise and update regulations, allowing the financial regulators to more quickly address the evolving industry.”

There are many areas where new legislation — enlightened by the power of RegTech — can dramatically improve compliance:

  • Financial transparency
    fully searchable, standardized, and machine-readable financial data
  • Blockchain
    integrating distributed ledger technology into the US capital markets
  • Uniform Laws
    draft state legislation to be relative uniform across the nation
  • Sandboxes
    regulatory and industry sandboxes to create safe spaces to offer innovative services

Enacting legislation on these fronts does take time, but there is progress. For example, the proposed Financial Transparency Act (H.R. 1530) is considered the country’s first RegTech law and would modernize the U.S. financial regulatory reporting process. Various studies, commissions and initiatives are underway exploring numerous options for other RegTech policies.

All parties — citizens, companies and regulators — have a vested interest in seeing RegTech achieve deep implementation within compliance. After all, the safety, soundness, and stability of the global financial system is vital to us all; improving it, enabling more efficient, flexible, and accurate data is a big deal and worth spending the time to get it right.

The information in this blog is intended for public discussion and educational purposes only. It does not constitute legal advice.

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