The overhaul of the financial services industry in the post Great Financial Crisis (GFC) era has created a swathe of new rules and regulations for the regulators to monitor, and financial firms to adhere to. While such changes have presented firms with significant challenges, transforming how they operate and behave on a day-to-day basis, it has coincided with another notable overhaul in the tech arena.

While technological innovation within the financial services industry has been rapid, helping firms adjust and comply with the new frameworks, as we head into 2020, means it won’t just be financial institutions embracing what tech has to offer – regulators will too.

But as we expect to see a much more extensive adoption of tech from leading financial services regulators, what does this mean for regulated financial firms?

Regulators are catching up 

It’s been no secret that the increased financial regulation over the past 12 years, aimed at protecting consumers, investors and cultivating a much fairer marketplace, has subsequently created opportunities to provide technology as a solution to help ease the burden on financial institutions.

Technology aimed at doing this, ‘regtech’ has grown exponentially. A study by Data Driven Investor showed that over 60% of institutions believe that it is likely that regtech will have an increased budget in their internal compliance costs and business development plans. Currently, the regtech market is expected to be worth $12.3 billion by 2023‎.

However, it is not just the regulated firms themselves that are waking up to the benefits of technology. With regulators resources stretched and a plethora of post-crisis regulation to oversee, enforce and analyse, it is now making sense for the regulators themselves to embrace technology.

By utilising Artificial Intelligence (AI), big data and other analytical tools, regulators can get better insights into the markets, understand consumer and institutional behaviours, and pre-empt abuse or potential issues before they become full-scale market problems.  

This take-up is already underway. In 2017, the International RegTech Association (IRTA) was launched, with the aim to promote standards, certification, innovation and collaboration in the sector. This was supported by a recent report promoting the adoption of regtech by regulators to streamline their internal processes, which the FCA has already begun by exploring how technology can make it more efficient and relieve the burden on firms.

The story is similar for the US. The Consumer Financial Protection Bureau (CFPB), which focuses on consumer protection, has invested heavily in analytics and digital technology. For example, the agency created eRegulations, an online tool to help users find, research, and understand regulations.

In the EU, the regulators have put significant emphasis on how technology is used by firms. In the UK, the FCA is stepping in to make sure that financial institutions do not abuse their newfound ‘big data power’. For example, it is looking into how insurance firms use their own large data collections by using web analytics and social media data. The FCA is also re-evaluating its use of technology and is currently in the second pilot phase of its digital regulatory reporting (DRR) initiative.

Where do financial firms come into this? 

With the regulator welcoming a much larger role for tech, it is now crucial for regulated firms to ensure they can work alongside them. Increased technological integration will enhance the regulators’ capabilities, expectations and efficiencies, which will require regulated firms to have their houses in order to keep up.

Firms will need to make data and control transparency priorities as they implement these tools and comply with data requests. They will need to ensure they have the capabilities and platforms in place that will be able to provide the regulator with what they want, when they want. While there has been criticism of the regulators for a somewhat lackluster approach to enforcement on MiFID II, MAR and other new financial regulations, their adoption of technology will likely bring this to a close and we will see the regulator sharpen up its act. It will therefore no longer be sufficient for firms to cut corners in the hope that the regulators will bypass detail or glance over small inaccuracies.

Firms should therefore be looking to continue to invest in holistic technology solutions to assist them with their regulatory duties, streamline their operations and consolidate their data. By doing so, they will improve their credibility with regulators today and be ready for a future when regulators have adopted more advanced surveillance and monitoring solutions.