Regtech On The Rise

Author:Mr David Liu and Claire Simm
Profession:Duff and Phelps

Technology is increasingly being integrated into supervision and compliance as regulators and firms respond to digital disruption.

For some time, technology has driven certain core aspects of the financial services industry, such as trading and online banking, but its adoption in regulatory compliance has been more muted. This is rapidly changing, however. Interestingly, regulators are playing a key role in accelerating that shift: As regulators become more proactive in adopting technology in their supervision of the industry, firms are having to evolve their compliance functions accordingly.

For Regulators, Competition and Moore 's Law

Until recently, regulatory agencies have generally not been seen as technology innovators. But in many ways, they are now responding as firms have been to the fast-moving and dynamic forces unleashed by digital disruption. Consider the progression of EU Anti-Money Laundering Directives. While nearly 12 years elapsed between the adoptions of the third and fourth directives, the fifth directive followed just a year later and the sixth directive is already on the drawing board. The need to account for technologies such as virtual currency platforms and e-money is a contributor to this acceleration. Regulation is thus following its own version of Moore's Law.

The adoption of technology by regulators is also driven by the fact that regulators operate within a market and are subject to its forces. Just as investors increasingly factor in the quality of a financial institution's compliance when deciding where to invest, investors, financial institutions, and corporations all consider the strength of a jurisdiction's regulation when deciding where to do business. In the EU, for example, jurisdictions have been effectively competing with one another as UK-based institutions consider locations for their post-Brexit EU headquarters. Regulators thus have an incentive to be seen as technologically progressive.

The use of technology also sends a clear message regarding regulatory priorities. In Hong Kong, the emphasis on creating a more supervised environment for corporations has bled over into Hong Kong's handling of the financial arena; the Securities and Futures Commission has not only greatly expanded the Business Risk Management Questionnaire but has also signaled that it will be using algorithms to analyze the responses and identify inconsistencies and other red flags.

For Firms, Strategy, Budgeting, and Support


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