What is Reg-Tech
di Dario Panza
The subsequent paper is aimed to provide an overview of what Reg-Tech is and how it can be beneficial for the market.
The paper will follow the structure hereto unfolded: the first part is devoted to provide a definition of Reg-Tech, the second part will parse the benefits Reg-Tech is enriching the market with and the third part will conclude.
The increased complexity brought in the marketplace by Fin-Tech as well as the wave of scandals involving global financial markets over the past twenty years urged regulators to equip themselves with a set of novel and more effective regulatory tools. Moreover, a change within the composition of the market players’ class (Fin-Tech is bringing the dis-intermediation of financial transactions, allowing any company or individual to act as a lender, e.g. peer to peer lending) required the adoption of a generalized, rather than financial institution specific, compliance system. In addition, remarkable advancements achieved by the tech industry (cloud, big data analysis) enticed regulators to embrace new technologies and make them spouse their cause. The combination of the above mentioned factors has recently determined the rise of a new phenomenon: Reg-Tech, new technologies deployed as regulatory enforcement means. A list of the most common tools populating the regulatory environment is provided here below:
Pattern analysis, which can be used to identify unusual patterns of activity, such as “spoofing” (placing an order and then cancelling it seconds later to encourage others to drive up the price of a particular asset), front running and wash trades, using predefined patterns of trading behavior;
“Big data” techniques, which typically use a far larger number of inputs than standard surveillance techniques, helping to straddle information silos. The algorithms used have the potential to detect a wider range of suspicious activity than pattern analysis, and can also be used to identify networks of trading and communications activity which may themselves identify vulnerabilities;
Predictive coding, which looks to identify patterns of activity, such as unusual use of communication, non-routine patterns of leaving the office, non-completion of training, or missing mandatory leave, which may flag potential conduct concerns, and
Digitalization of voice communications, which some firms claim has the potential to be more effective than analyzing written communications.
The benefits of Reg-Tech for the market
The many scandals that impacted the financial system in the last seventeen years called for an increase in regulators intervention in the form of compliance obligations, which, in turn, meant higher costs for market players in order to stay in the market. The outcome of the latter policy is blatant: barriers to entry the market rose dramatically, stifling competition among players. Only the ones with the appropriate size and capital, capable to endure substantive compliance cost were admitted in the game. The advent of Reg-Tech is turning the past scenario upside-down. Because set of tools that fall within the realm of Reg-Tech, consent established banks, challenger banks, non financial institutions as well as start-ups to comply in a cost-effective manner with the massive bulk of obligations required by laws and regulators all over the world, effectively Reg-Tech is democratizing the access to capital markets. By leveling the playing field the latter is allowing a generational shift (start-ups and non financial institutions acting as such) within financial markets that the world is witnessing in the current time, which would have not been possible by other means.
Liberalizing access to the market is something that Suade, a Microsoft Ventures start-up, is trying to do. The firm seeks to help big and small banks alike to adapt constantly to changes in regulation and become more cost efficient. While new regulations are designed to bring transparency and stability to the financial sector, the practical cost and logistics financial institutions need to invest in understanding them is massive. Suade wants to help take care of that, leaving banks to focus on serving their clients.
Furthermore, not only Reg-Tech seeks to address the multiplying compliance obligations in a cost efficient manner, but it is nurtured and supported by governments. The UK is a great example of where this is happening. The financial Conduct Authority (FCA) provided clarifications on the steps tech companies must take in order to comply with UK regulations and have collaborated with firms through partnerships with financial institutions, accelerators and academics. Eventually, however, as Diana Paredes (CEO of Suade) puts it, the focus is not so much about compliance, but rather on prudential regulation: “a lot of people are yearning for a benchmark that is necessary to prevent the next financial crisis, what we’re trying to is democratize regulation, not from compliance side so much as prudential side. Lehman Brothers was a hard thing to forget – it affected everyone in the world, not just bankers. Trust was broken between the banks and the people in the streets – everyone wanted their money back. If people stop believing in banks the economy is in real trouble. The ethos of our company is that we’re trying to prevent the next financial crisis. Banks have understood that the only way to do it is through regulation – and it’s about embracing that.”
The Paper at hand stroke an attempt to deliver a broad overview on the mysterious concept of Reg-Tech and the tools that mostly represent it and are currently more common in the market. Further, it highlighted the cost-shrinking effect Reg-Tech is impacting the market with, lowering down the barriers to entry and thus effectively democratizing the access to it. However this new phenomenon is still at its embrional stage, therefore it is tough to give an assessment once for all. For what we see, it definitely has potential to revolutionize the market’s landscape, but by now we can just sit back and follow closely how the Reg-Tech thing unfolds.