The paper explores the potentially transformative role that regulatory technology (RegTech) might play in tackling the fragmented U.S. financial environment by providing an overview of the international movement in innovation and RegTech, as well as the current efforts by U.S. regulators. It also puts forward a framework by which regulators can assess their drive towards becoming leaders of digital change.

The field of RegTech has mainly targeted ‘process automation’, such as improving inefficiencies within regulatory reporting for financial institutions, and using technology to ease the burden of compliance.

This report focuses on the greater potential of RegTech for regulators. Representing a broader promise to encourage a ‘systems evolution’ or re-designing of the regulatory architecture including digital financial infrastructure (DFI), which may encompass anything from payment systems to shared reporting utilities.

A recommended RegTech framework to help regulators become leaders of digital changes is outlined in the report. It includes three broad approaches, which can be implemented alone or in tandem:

• Ecosystem - Government engaging with industry, such as LabCFTC in the U.S. and the Financial Conduct Authority’s regulatory accelerator can help identify new technology and market developments, allowing regulators to work closely with technology innovators and understand any process and regulatory infrastructure adjustments that may need to be made.

• Digital Financial Infrastructure - Implementing new technologies, such as real time reporting, shared utilities, or application programme interface (API) architecture, can help facilitate the streamlining of banks’ submission of applications, payment settlement, and securities clearing

• Rule and Process Changes - Implementing new rules and processes to encourage and allow innovative solutions to regulatory compliance issues, both for the regulator and for industry This could include defining new regulation in a machine-readable format that can be applied automatically; or adjusting a handbook to accommodate the application of new technology such as blockchain compatible data protection or identity rules.

Commenting on the report, Daniel Morgan, Director of Policy and Regulation at Innovate Finance said: “The first wave of RegTech has focused on market driven process automation in the face of ever increasing costs of compliance for financial institutions. The second wave of systems evolution will also fundamentally reduce the cost and burden of regulation and will require a radical rethink of regulatory processes.”

Lawrence Wintermeyer, CEO of Innovate Finance, said: “Regulators are already making this transition and while this future is some years from becoming reality, only by pursuing a holistic approach to technology-enabled regulation will regulators move beyond adapting and automating existing practices and start to reimagine rules and process fit for a digital age.”

Richard Schaberg, Partner and head of Hogan Lovells U.S. Financial Institutions Practice Group, said:
“FinTech, RegTech, and innovation, generally, have the potential to radically transform the U.S. and global financial systems. U.S. regulators have, so far, remained more cautious than some of their international counterparts in embracing technological innovation in financial regulation. The Report provides insight into the international efforts to encourage and deploy new ideas and techniques for regulatory compliance and outlines the steps the U.S. can take to fully integrate the evolving and essential features of RegTech into our own systems.”

The Future of RegTech for Regulators, Adopting a Holistic Approach for the Digital Era Regulator was presented in Washington, D.C. today at a TPWG gathering, hosted by Innovate Finance and Hogan Lovells. Launched in 2016, the TPWG brings together leading U.S. FinTech companies to help foster an open, collaborative, and inclusive dialogue with respect to FinTech policy approaches and frameworks in the UK, U.S., and around the world.