This week's CSFI (Council for the Study of Financial Innovation) discussion between representatives from the Bank of England, VC Illuminate Financial and Kompli-Global, an intelligent KYC/AML utility, highlighted how elastic a term Regtech still is.
But, more usefully, it enabled a set of common views, attitudes and interests to emerge which did more to create a sense of coherence across the spectrum of work going on under the Regtech banner than the term itself.
Here are some of them:
RegTech is not new. Whilst the term may be newly minted, many of its business problems and responses have clear lineage back 30 or 40 years. What has changed are:
- the technologies available and their combinative power, particularly cognitive computing.
- increased operational complexity calling for smarter solutions.
- the maturing Fintech investment ecosystem.
- the concentration of specialist regulatory experience in the world's financial hubs.
Regtech solves problems. Issues and requirements thrown up by regulation call for new solutions. More bodies are not the answer. These new solutions are often very specific to a problem so taking many new services, rather than a single monolithic
system, is the direction of market travel.
Regtech is intelligent. Machines learn patterns to detect anomalous behaviour. Standards are set to enable data definitions to be translated into machine code for different uses, enabling automated and accurate data extraction from source
systems for analysis and aggregation.
Outside-In is best. It has simply become far more efficient, more flexible and quicker to buy in Regtech solutions than to build them in-house. That in part explains the steady switching of specialists out of Governance Risk and Compliance
positions into Regtech start-ups.
RegTech transforms data provision and reporting. The explosion in reporting requirements since the Financial Crisis has stimulated effort to improve data provision and reporting processes between industry, regulators and central banks. Regtech
solutions tag and track aggregated and reported data back to the level of original data on a granular level. The EU's Anacredit project, for example, identifies, aggregates and compares credit exposures and detects associated risks on a loan-by-loan basis.
Regtech is global as well as local. The same thorny issues are faced continuously by businesses and Governments alike, in Developed and Developing Economies:
- How do we verify the identity of our counterparties?
- How do we know we can trust them?
- How do we onboard them, manage them, tax them?
- How do we identify fraudulent behaviour and how do we act with the customer to stop it?
- How do we report our numbers to the regulator accurately, on time and at the required level of detail most efficiently?
Even if Regtech has to act globally, it has to engage with local regulators and regulations, jurisdiction by jurisdiction; so there are no short cuts.
Regtech was invented by Regulators. The FCA ran up the Regtech flag in 2014/15, to define what Regtech is, should do and why. The PRA is charged by the UK Government to identify how to support Regtech and stands to be both a prime beneficiary
and stimulus to more highly automated data provision. Internationally, the G20 vigorously promotes the pursuit of tax evasion, the exposure of Beneficial Owners and their reflection in tougher national and regional regulations. All this helps to create the
climate in which Regtech innovation can thrive.
Each of these factors goes some way to explain why Regtech is culturally a distant cousin to some of the racier parts of the Fintech scene. And why, perhaps, it will deliver even greater benefits over time than they.
So, what matter the label 'Regtech'? The work going on is the true story. It's unmistakeable when you see it and, though I blush to say it, rather exciting.