Regtech Collaboration: Making the Future of Innovative Compliance a Reality

The FCA, together with the BoE and various firms, including Barclays, are exploring how they can use technology to create machine-readable rules and link regulation, compliance processes, and firms’ policies and standards together with firms’ transactional applications and databases. If successful, this opens up the possibility of a model-driven and machine-readable regulatory environment that could transform and fundamentally change how the financial services industry understands, interprets, and then reports regulatory information.

The FCA recently conducted a RegTech TechSprint in conjunction with international policymakers, including the U.S. Treasury and FDIC that looked at anti-money laundering and Fincrime. All the teams participating in the TechSprint were tasked with developing better technology to combat money laundering. Ten cross-industry teams, with more than 100 participants, competed in this year’s event, as well as C-suite executives, professional bodies, global regulators, law enforcement representative, and academics who attended the final presentations and competition judgment. The slogan for the TechSprint was “It takes a network to defeat a network,” and the teams worked to solve the real-world problem of whether the government and financial industry through greater international collaboration and the use of new technology, including privacy-enhancing encryption tools such as multiparty computation and zero-knowledge proof, can enable truly safe sharing of information. Further, it could help to improve the detection of big data patterns that are indicators for crime, across the boundaries of firms, governments, and jurisdictions. The Regulatory Sandbox provides a ‘safe space’ for businesses to test innovative propositions in the market, with real consumers. Sandbox tests are expected to have a clear objective (for example, reducing costs to consumers) and to be conducted on a small scale, so firms will test their innovation for a limited duration with a limited number of customers. The FCA is now in the middle of its fifth testing cohort and RegTech tests have occurred in the various cohorts.

RegTech for Regulators (R2A) is an accelerator backed by the Bill & Melinda Gates Foundation, Omidyar Network, and the U.S. Agency for International Development that partners with financial sector authorities, including the Philippines’ central bank. One of R2A’s aims is to evaluate the potential of technologies and data science to strengthen the capacity of the financial authorities to regulate, supervise, and provide policy analysis, by improving and increasing the volume, variety, speed, and accuracy of data available to the financial authorities.

According to the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, this data is crucial to “drive risk-based supervision, for the implementation of mechanisms to facilitate innovation (e.g., regulatory sandboxes), and for the development of proportional regulations. This is critical to achieve healthy financial inclusion.” RegTech providers should demonstrate their value and effectiveness in easing various regulatory burdens to financial firm users and regulators alike. As ever, collaboration amongst industry (including RegTech startups, financial institutions and policymakers) is key for widespread adoption. Financial services firms’ transition to open, API-based technology architectures is conducive to integrating RegTech. At the same time, regulators are encouraged to revisit and update rules in consideration of new technologies while fostering innovation and promoting uptake.

In the words of Christopher Giancarlo, ex-chairman of the U.S. Commodity Futures Trading Commission, “RegTech poses significant opportunities for those involved in our financial markets, both participants and regulators. I suspect we are in the ‘early innings’ of this space … but believe that it is imperative for all involved stakeholders to do their part in understanding emerging technologies and think creatively about incorporating such technologies.”