Innovate to regulate

One cannot discuss the past, present and future of the FinTech industry without considering the critical role regulators can play in either inhibiting, or fomenting, innovation. Fortunately for FinTechs in the UK, in recent years the nation has had one of the most progressive regulatory regimes in the world, with stimulating innovation and competition high on the agenda.

Regulatory initiatives, such as Project Innovate and the regulatory sandbox, have been designed to help FinTechs navigate regulation. As such, regulation, along with changing customer expectations and technology-enabled innovation, can be said to be one of the three key driving forces behind the burgeoning FinTech sector.

However, while the role of the regulator in fostering innovation is widely discussed, there is far less talk about how regulators can embrace technology to innovate themselves. This question was raised at the 2018 Innovate Finance Global Summit in the panel, What will the Regulator of the Future Look Like? 

Moderator Jo Anne Barefoot, CEO of Barefoot Innovation Group, kicked off the debate by claiming that “we’re in the process of digitising finance, and, right behind that, we’re digitising financial regulation. Big data, artificial intelligence, and analytics will transform financial regulation as well”.

Martin Etheridge from the Bank of England believes that the remit of regulators is not going to fundamentally change. What will change, however, is how regulators use new technologies to “collect, access and analyse the vast swaths of data in the financial system”.

Mark Adams of the Australian Securities and Investments Commission said that, while such analysis is already possible and operational in certain “areas where there are deep data sets, such as in financial markets where we apply real-time supervisory technologies”, other, less digitised areas such as financial advice are not currently ready for new forms of regulatory oversight.

The regulator of the future will also embrace innovative thinking as financial services firms have done as they look to make regulation and regulatory reporting more efficient. Nick Cook, Head of RegTech and Advanced Analytics at the FCA, gave the example of a recent ‘tech sprint’ in which regulators and the private sector came together to look at whether regulators could “specify legal requirements in a form that is fully readable and executable by computers, without human involvement”.

A key theme throughout the panel was that of the need for greater collaboration and communication between regulators with different remits and in different jurisdictions. Mark Adams believes that “connections between regulators globally will only deepen” going forward.

Abu Dhabi regulator Richard Teng agreed, opining that “we can’t learn fast enough in our separate islands”. He believes that, in a world of technology-enabled globalisation, “multiple regulators lead to an inconsistency in approach. Over time, there will be a consolidation in regulatory structure”. However, Martin Etheridge fears that such consolidation could lead to regulators “losing an element of their specificity and specialisation”.

There was also some disagreement over the potential future role of utility solutions, such as cross-industry risk solutions. Richard Teng believes that, with the “regulator involved to build trust and capabilities”, solutions which allow banks to share information, and only onboard customers once, could allow the financial sector to make significant savings in terms of anti-money laundering (AML) and know-your-customer (KYC).

However, Nick Cook expressed concerns that such solutions could disproportionately benefit large players over new, small FinTech firms, stating that regulators “have to be very careful about the distorting effect they may have on the market”. However, he still believes there are areas where such utilities will be the solution in the future.