Innovation in the field of Fintech in general and Regtech in particular cannot flourish with the support of regulators. Lawmakers and authorities provide the framework and play an important role in the practical application of new services and solutions. All the more is it disappointing to see how much the various financial watchdogs do to foster innovation or, if only, to gain a better understanding. This is why we think that regulators need to do more and explain based on the example of the recent Commission Fintech Consultation.
At the end of March, the European Commission launched a public consultation on FinTech: a more competitive and innovative European financial sector to further develop the Commission’s policy approach towards technological innovation in financial services. The consultation was published and announced during the Commission’s Fintech event #FinTechEU on 23rd March. The consultation ran until 15th June and you would assume that it has receives quite a bit of feedback, but it will be for another couple of weeks before the Commission will publish the responses of the participants. Having said that, there are two participants that have already published their contributions: the European Supervisory Authorities ESMA and EBA (the third ESA, EIOPA, is responsible for the insurance sector and it appears that is hasn’t submitted a response of its own to the Commission). The ESMA and EBA comments are available on their respective websites.
The consultation paper
The original consultation paper is structured, in the Commission own words, “along four broad policy objectives that reflect the main opportunities (as well as the relevant challenges) related to FinTech:
- Fostering access to financial services for consumers and businesses;
- Bringing down operational costs and increasing efficiency for the industry;
- Making the single market more competitive by lowering barriers to entry; and
- Balancing greater data sharing and transparency with data security and protection needs.”
It covers everything from general questions on FinTech to the use of Artificial Intelligence to Cloud Computing and Blockchain, but we would like to focus on an aspect naturally very dear to us: Regtech. Under section 2, the Commission appreciates that “an entire category of financial technology solutions helping firm comply with regulatory requirements has become known as Regtech.” The Commssion also acknowledges that “it has the potential to reduce regulatory compliance costs even in areas where business processes remain unchanged. Regtech also provides an opportunity for regulators to access data more easily and to customise the compliance requirements, whilst enabling the regulated entities to reduce their compliance costs and to lower operational risks without compromising on regulatory objectives.”
Based on this premise, the Commission invited the public to provide input on the following questions:
What are the most promising use cases of technologies for compliance purposes (Regtech)? What are the challenges and what (if any) are the measures that could be taken at EU level to facilitate their development and implementation?
The Supervisors Feedback
With regard to Fintech in general and Blockchain in particular, regulators and lawmakers have been praised for their wait and see stance instead of issuing prematurely rules that could smother innovation, but we believe that the situation in relation to Regtech is slightly different. While it is important to gain a comprehensive understanding of the technical aspects and the impact of innovation on financial services, Regtech sits directly at the node between authorities and regulated firms. As such it isn’t necessary to analyse the impact of those solutions on financial instruments and markets and the Commissions introduction on the subject points in the same direction. This is one of the reasons why regulators need to play an active role in this process and embrace this unique opportunity to create a better regulatory environment, which will eventually create better business environment with safer markets and improved investor protection.
Like the Commission, ESMA seems to agree on the opportunity that comes with Regtech for both regulators and regulated firms. However, this is as far as the authority goes:
“There may be significant benefits if market participants and regulators use more of this technology in order to facilitate compliance with recent set of legislation developed after the global financial crisis. These new legislations, among others, aimed at increasing transparency in the markets and enhanced reporting requirements. ESMA acknowledges that regulators too need to be adequately equipped to collect and analyse all the data they receive in order to achieve these new policy objectives.”
Unfortunately, ESMA does not provide any input with regard to the actual questions, which is, to put it mildly, rather disappointing.
The feedback from the European Banking Authority is equally unsatisfactory:
“The EBA would welcome a coordinated approach to the use of technologies for regulatory and compliance purposes and is ready to work with competent authorities and the industry to identify the most relevant use cases, in particular in the field of supervisory reporting, and the use of innovative technologies to improve supervisory efficiency and effectiveness and ensure that at least a certain degree of standardisation and interoperability is achieved.”
Not exactly an example of a proactive and hands-on approach…
The Road to RegTech Innovation
What should regulators do? For starters, more than events like #FinTechEU. While its various roundtables and presentations offered ample opportunities to discuss Regtech, it if any played only a very minor role despite the focus of the second of its three roundtables being Regulatory and Supervisory Innovation. This is also highlighted by the lack of Regtech firms being present on the event’s panels and the audience, but if that is a personal impression of the event, we would be happy to stand corrected and hear your views. However, even if events are more focused on the specifics of regulatory technology, it remains doubtful how big an impact a single event once or twice a year can have. Instead, a continuous process of conversations and collaboration needs to be established in our view. While regulatory may complain about their limited resources, it is not acceptable as an excuse for not picking up the baton and leading the charge.
The case of ESMA, EBA and European Commission isn’t an exception though and this post could have concentrated on other regulatory authorities and institutions instead. For instance, only this week the Wall Street Journal titled that the FATF Wants To Use Fintech Against Money Laundering. While it is great that the Financial Action Task Force seems to have understood the value of innovation in its battle against money laundering and terrorism financing, it is telling that until its recent event at the end of May it does not seem to have appreciated it and it remains to be seen what comes next and when.
What do you think? Are we unnecessarily harsh with the regulators or do your own experiences are in line with our views? We would love to hear your thoughts, so drop us a line at firstname.lastname@example.org . After all this should be a dialogue, right?