Regtech or Suptech holds enormous potential. The ability of regulators to tap into data and automate compliance can reduce the cost for regulated firms while speeding up the process for entities entrusted with ensuring that financial services firms fulfill their regulatory obligations. Today, change is moving faster than ever in the financial sector, and keeping pace with it is both difficult and necessary for regulators.
The Cambridge Centre for Alternative Finance (CCAF), a leading independent research entity covering the evolution of digital finance, has published an article on financial regulation in the age of Fintech, addressing the Regtech conundrum.
Authored by CCAF co-founder and Executive Director Bryan Zhang, he says that “being an effective financial regulator in the Fintech age is more important and challenging than ever.” Zhang advocates for strategies that are mutually beneficial to both sides involved in the process. Innovators need to comply with rules, and regulators need to ensure that these rules are being followed – all without being overly intrusive and excessively costly.
“Seismic shifts – driven by rapid technological innovation, evolving online habits, more direct buyer-seller interaction through market disintermediation and changing business models in an increasingly complex geopolitical landscape – are reshaping the fabric of the global financial system. Regulators play a pivotal role in this transformation and must adapt swiftly to ensure that innovation is balanced with consumer protection, market integrity and financial stability,” explains Zhang.
He posits that there are four forces dividing regulators and innovators, which can undermine both regulators and regulated entities. While regulators follow paths developed decades ago, the world has changed dramatically, and these agencies are struggling to keep pace.
Zhang proposes a way to ignite “regulatory transformation,” including:
- Embedding innovation into regulation
- Reinventing organisational processes
- External collaboration
- Systemic innovation and evolving regulation
All of this leads to “regulatory singularity,” where “regulatory systems are continuously adaptive and capable of co-evolving with financial innovation.”
Yes, regulators are notoriously process-driven, anchored to the past, and hesitant to change. Zhang knows his proposal may be “utopian,” but the disparity between both sides impedes innovation while making it more difficult for regulators to do their jobs. And firms want balanced and reasonable regulation as it provides the public with a greater element of assurance and security. Good regulation can boost innovation and support digital finance.
Zhang states:
“We should foster a culture of regulatory co-ordination by leveraging digital-first collaborative platforms and building communities of practice and innovation across sectors, regulatory mandates and borders.”
His recommendations aim to narrow the “innovation delta“- the widening gap between regulators and innovators. Zhang aims for a “future where regulation is as dynamic, attuned, and evolving as the systems it seeks to govern.”