Regtech is not fintech, says Stephen Scott at Starling. While fintech firms look to regulators for permission, what most regtech firms require from regulators is their collaboration.
In a just released update to an annual survey, Thomson Reuters finds that, at 85% of the globally significant financial institutions (G-SIFIs), the board has at least “some involvement” in their firms’ exploration of regtech solutions. Nearly 40% of those firms report their board to be “fully engaged” – up from 13% last year. And 21% of them have added people with specialist skills or otherwise invested in their ability to better consider developments in fintech, insurtech and regtech – up from a mere 2% in the prior year.
While this ten-fold increase is impressive, it nevertheless implies that 79% of those firms have yet to demonstrate comparable progress. But the G-SIFIs are clearly leading the way on the implementation of regtech solutions, with 75% reporting that they have either fully or at least partially implemented one such, and 48% indicating they expect their budget for regtech solutions to grow. Regtech appears to have come of age.
Yet growth of the industry may prove stunted without adequate support, and the Thomson Reuters survey identifies three key areas where regulators, governments and relevant supra-national bodies could provide valuable assistance: clear messaging on regulatory expectations, engaging with the industry (both startups and supervised firms), and by providing support for innovation through incentives and other encouragement.
Some have taken heed. The Hong Kong Monetary Authority (HKMA), for instance, recently issued a request for proposals, seeking support with “facilitating the adoption of regulatory technology by the banking industry.” The Monetary Authority of Singapore (MAS) has long been a leader in actively promoting the local fintech and regtech scene. Most notably, for my firm, it has devoted specific attention to the opportunity for regtech to help address the challenges of culture and conduct related risks.
In Australia, however, some argue that relevant authorities have failed to keep up with regional peers.
What’s Up Down Under?
But efforts are underway. For instance, last year, the Australian Senate established a Select Committee on Financial Technology and Regulatory Technology, tasked with enquiring into and reporting upon opportunities in the space.
The Committee will examine barriers to the uptake of new technologies in the financial sector, the relevant progress seen in other markets, and will consider the effectiveness of current initiatives to promote a positive environment for fintech and regtech start-ups in Australia. A year after the Hayne Royal Commission, the Committee naturally wants to explore how regtech may strengthen compliance, while reducing costs.
As a critical first step, the Committee solicited feedback from the industry. As of this month, it has received over 140 submissions from interested parties, several regtech firms among them. My company, Starling, was one such. Our submission emphasised that, while many regtech firms focus on the financial sector, regtech is not fintech.
The Committee appears to recognise this in its request for relevant commentary, but I would emphasise here a key distinction that is not referenced therein.
Commonality of Interest
Most fintech firms seek to bring financial products to market, impacting consumers. Those offerings require regulatory oversight, much as do product offerings brought to market by traditional financial firms, and engagement between fintech firms and financial regulators is most often driven by this imperative.
For instance, this is a key driver behind the development of ‘regulatory sandboxes’, which serve to create a safe space within which to conduct product trials until such time as those products may win needed regulatory approvals. In sum, fintech firms look to regulators for permission.
This is not necessarily the case for regtech firms, which build products that are unlikely to touch consumers directly. As such, these technology offerings typically fall outside the scope of direct regulation. Rather than looking to regulators for permission to operate in the market, what most regtech firms require from regulators is their collaboration.
This is driven by a clear commonality of interest. Regulators seek to safeguard public interests through supervision of the financial firms they oversee. Regtech solutions providers operate in a manner consistent with that cause, by seeking to provide financial firms with a superior set of tools with which to satisfy their regulatory mandates. This suggests opportunity for precisely the sort of collaborative engagement referenced in the Thomson Reuters study.
A Collaborative Ecosystem
A relevant illustration of such collaboration between public and private entities is found in the collaborative ecosystem established by the US defense and intelligence communities. Grant-making bodies like the Defense Advanced Research Projects Agency (DARPA, under the US Department of Defense), and the Intelligence Advanced Research Projects Activity (IARPA, operating within the Office of the Director of National Intelligence), have long worked to promote private sector research into matters of critical national interest through research grants.
More recently, the US government has made venture capital available to startups through the Defense Innovation Unit (DIU) — “the Pentagon’s Innovation Experiment”— established to help the military make faster use of emerging commercial technologies. And then there is In-Q-Tel, the CIA’s venture capital unit, working to accelerate the adoption of cutting-edge technologies that may help to preserve national security.
If Australia wishes to establish itself as a leading global hub for regtech, inviting foreign direct investment and creating technologies for global export, perhaps it may consider promoting this through similar agencies. Alternatively, additional budgetary resources might be awarded to existing agencies, earmarked specifically for use in promoting regtech innovation, development and adoption. ASIC (Australian Securities and Investments Commission), for instance, seems particularly well suited – and eager.
The requisite Treasury resources to fund such an initiative adequately would be orders of magnitude less than the monies lost to the Australian economy as a consequence of the misconduct scandals that have filled the headlines in recent years.
Stephen Scott is founder and CEO of US-based RegTech firm Starling.