Reporting and Governance

The big prize promised by regtech is to provide genuine financial stability where looming risks can be detected and managed in real-time by regulators and firms before they ever develop into a full blown crisis. By Ross Buckley, Scientia Professor, University of New South Wales and Deborah Young, CEO, the RegTech Association

Corporate law has expanded significantly recently, with laws covering misconduct, as well as ‘traditional’ white collar crimes, such as tax evasion, fraud and money laundering. 

The Australian Securities and Investments Commission (ASIC) is embracing a “why not litigate?” mantra and – via the "fairness" provision of the Corporations Act (formalised in March) – it can now level penalties of up to A$525m ($360m) on companies and A$1.05m on individuals. Off the back of Australia’s Royal Commission, up to 501 matters have been initiated in the federal courts, plus Treasury is spending A$10m for 40 pieces of legislation in the next 12 months.

The rise in governance is a global phenomenon. From the global financial crisis (GFC) in 2008 to 2015, developed markets alone saw a 492% increase in regulatory changes, with a particular focus on compliance with anti-money laundering and consumer protection rules.

The pace of change and the penalties for non-compliance are high. At a global level, in 2017, an average of 216 new regulations were introduced per day. And in 2018, financial institutions were charged more than $100bn for failures of regulatory compliance.

Becoming ‘regtech-ready’

In Australia, spurred on by the Royal Commission, banks are adopting regulatory technologies, or regtech, to automatically monitor and respond to evolving regulation. As well as supporting compliance, regtech enables banks to be more flexible and customer-centric – by providing capabilities from digital identity validation and monitoring of financial promotions to risk management.

Keeping in step with corporates, regulators are also beginning to explore artificial intelligence and machine learning to interrogate regulatory returns and identify risks and anomalies. For example, at a recent forum, ASIC shared the results of a natural language processing (NLP) technology trial to listen to insurance sales calls to screen for inappropriate language. This enables ASIC to routinely analyse thousands of calls, instead of human listeners painstakingly listening to hundreds of calls.

Better brakes, faster car

Going beyond its role in helping corporates and regulators to comply and enforce regulation, the real promise of regtech is to establish macroeconomic stability, by making regulatory supervision a function carried out in close to real-time. Furthermore, regtech can accelerate commerce. 

The digital checks and balances regtech can bring are like fitting high performance brakes on a racing car. Counterintuitively, the brakes are vital to the driver’s ability to go fast – without them, we would all drive so slowly. Similarly, when it comes to observing regulation, regtech can provide the confidence the system needs for commerce to move fast and to rapidly adapt to disruption. Conversely, a key cause of Australia’s economic slowdown is the tightening of standards for bank lending. Regtech can assist banks in real-time to offer compliant services, including lending.

Macro-level financial stability

In 2014, the chief economist of one of the world’s oldest banks, the Bank of England, Andy Haldane, articulated a futuristic, but realistic vision for a financial system akin to the bridge of the Starship Enterprise. Mr Haldane’s dream involves tracking the global flow of funds in close to real time [from  a Star Trek chair using a bank of monitors], in much the same way as happens with global weather systems and global internet traffic. Its centrepiece would be a global map of financial flows, charting spill-overs and correlations.

Regtech holds the potential to provide the macro-level supervision and stability that Mr Haldane envisioned through monitoring the systemic effects of markets and market participant behaviours – providing a picture of health and emerging risks, so that irregularities can be spotted and acted upon early. The Australian Senate has also identified the potential for technology to improve financial resilience – having established a committee to inquire and report on regtech opportunities, barriers, and future trends by October 2020.

Australia has the third highest concentration of homegrown regtech firms globally, behind the US and UK. These markets display the major opportunity to lead a new paradigm of regulatory governance. A recent global benchmark report showed that 118 regtech vendors earned annual revenues of nearly $5bn, which demonstrates the opportunity. However, 60% of those vendors were established between 2014 and 2018 and 82% had their first round of funding during this time. There is likely to be a major shakeup among global regtech start-ups in the next 12 months, as the need for new capital and customers arises urgently.

Regtech is the next inevitable evolution of regulation. It is time that top decision-makers across regulated sectors seized this opportunity – as a means to jumpstart the economy and to rebuild trust in institutions. The next two years will be crucial in determining which markets generate the regtech solutions that will inevitably underpin global financial services going forward.

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