Regulators will inevitably move to ‘real time’ policing of financial markets via technology, a new CFA Institute Research Foundation report says.
According to the CFA study, authored by Bud Haslett et al, improving regulatory technology (or RegTech) “allows the development of continuous-monitoring tools” to pre-empt compliance breaches and speed up investigations.
“… [RegTech] also fosters the development of simulation systems and sandboxes, which can identify the likely consequences of proposed reforms and new approaches,” the paper says.
“RegTech’s truly transformative potential lies in its capacity to enable the real-time monitoring of financial markets, thereby facilitating a reconceptualization of financial regulation.”
The ‘Fintech and regtech in a nutshell, and the future in a sandbox’ report says financial compliance industry is on the cusp of phase three in its evolution from quant-based system declunker to data overlord.
Dubbed ‘RegTech 3.0’, the next development phase will see technology create a new world for regulators where the focus flips from ‘know your client’ (KYC) to ‘know your data’ (KYD).
RegTech phase one and two, covering respectively 1967-2008 and 2008-now, primarily centred on eking out “cost and time efficiency gains” in the current system.
RegTech 3.0, which the report says should kick off next year, will “rethink how regulation operates and who is being regulated”.
“The primary barrier to RegTech’s development is not technological limitations but, rather, the ability of regulators to process the large volumes of data that the technology itself generates,” the study says. “… The new datacentricity underpinning the evolution of both FinTech and RegTech represents the early stages of a profound paradigm shift from a KYC approach to a KYD approach.
“As this shift unfolds, regulators must invest heavily in the development of proportionate, data-driven regulation in order to deal effectively with innovation without compromising their mandate.”
The study also says while RegTech is typically bundled under the fintech banner, it should be considered a “separate phenomenon”.
“In contrast to FinTech’s inherently financial focus, RegTech has the potential to be applied in many regulatory contexts,” the CFA report says.
Furthermore, fintech has been “fueled by startups” playing on post-GFC public mistrust of financial services firms, the commoditisation of technology, and “the recent rise in unemployed professionals seeking new ways to apply their skill sets”.
“In comparison, RegTech has emerged in response to top-down institutional demand arising from the exponential growth of compliance costs,” the study says.