Regulatory Technology (Regtech) - Construction of a New Regulatory Policy and Model

• Author: G. A. Walker
• Pages: 1-81

Regulatory Technology (Regtech) – Construction

of a New Regulatory Policy and Model

G. A. W

ALKER

*

The use of technology in banking and financial markets has grown

substantially in recent years.

1

Financial technology (FinTech) has resulted in

substantial innovation.

2

This has led to the need for new forms of financial

technology regulation (FinReg) to create a corresponding enhanced and

embedded control framework. One specific area of this consists of the use of

regulatory technology (RegTech) through which technology can be used to

support regulation and supervision in modern financial markets.

3

RegTech

has then evolved through various iterations with RegTech 1.0, 2.0, and now

the beginning of 3.0.

4

Financial markets have been shocked by financial instability and crisis in

the period following the Global Financial Crisis beginning in 2007 and

* Professor G. A. Walker, Professor in International Financial Law and Financial

Technology (FinTech) Law, Centre for Commercial Law Studies (CCLS), Queen Mary

University, London.

1. George A. Walker, Financial Technology Law—A New Beginning and a New Future, 50

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137, 151 (2017).

2. Id.

3. Regulatory technology (RegTech) is a complex, combination or contestable concept. A

number of different meanings can be distinguished. RegTech can refer to the use of technology

generally for control purposes in utility and other markets, or in the financial services area

specifically. It may refer to using regulation for control or direction purposes (ControlTech),

supervision (SuperTech), or both. It may refer to the tools or techniques used by firms for

internal business (FirmTech) or for compliance (CompTech) purposes. Different types of

RegTech may also be distinguished including regulatory policy (PolicyTech), supervision

technology as noted (SuperTech), resolution technology (ResTech), market support technology

(SupTech), and macro-prudential or macro-technology oversight (MacroTech). RegTech is

generally understood in this paper to correspond with ControlTech which includes narrower

PolicyTech, SuperTech, FirmTech, and CompTech as well as ResTech, SupTech, and

MacroTech. RegTech may be considered to constitute an essentially contestable concept which

is one with more than one meaning which includes some evaluative or qualitative element. See

generally Walter Bryce Gallie, Essentially Contested Concepts, 56

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167

(1956).

4. RegTech 1.0 is generally concerned with simple data collection before the global financial

crisis beginning in 2008. RegTech 2.0 involves the use of data for regulatory and supervisory

reporting between 2008 and around 2018. RegTech 3.0 represents a new phase or iteration

with the dynamic or creative use of data including through machine learning and artificial

intelligence (AI). See infra Section IV; see infra text accompanying note 289; see also Douglas W.

Arner et al., FinTech, RegTech, and The Reconceptualization of Financial Regulation, 37

N.W. J.

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. 371, 388, 397, 407 (2017).

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2008.

5

A substantial new regulatory framework has been constructed, much

of which is data-based (DataTech) with a new focus on trade and transaction

data reporting, electronic identification, personal data protection, account

data mobility, and data protection and cyber security (DataReg). Several

important measures have, in particular, been adopted in these areas at the

international level and within the European Union which have since been

implemented at the national level.

6

It is against this background that technology has undergone substantial

advances in recent years, especially in terms of computing and

telecommunications capability and digital data collection and management

with further advances in decentralisation, distributed ledger technology

(DLT), and blockchain to follow. Massive technological change brings

substantial potential benefit and advantage, although this also creates

significant new or aggravated risks. New forms of technological,

information, and data risks arise that have not been properly identified or

managed before (FinRisk and RiskTech with DataRisk and DataTech). A

recent phenomenon has also been the movement by large technology

companies (BigTech) into the financial area (referred to as TechFin) such as

with the continuing advance of such businesses as Alipay and WeChat in

Asia, Apple, Google, Amazon, and Microsoft in the West and Facebook’s

announcement of the creation of its digital Libra Coin.

7

Authorities have responded to technological progress through the

construction of new forms of support arrangements, such as the Project

Innovate initiative in the United Kingdom.

8

This includes a Regulatory

Sandbox, Advice Unit, Direct Support facility, and RegTech and

Engagement facilities.

9

The Financial Conduct Authority (FCA) has also

been instrumental in constructing a Global Financial Innovation Network

(GFiN) to bring together financial authorities and related organisations

across the world involved with FinTech and RegTech.

10

These initiatives

specifically support new start-up platforms and businesses although issues

remain with regard to maintaining financial stability and security at the

national and international levels.

We live in exciting but challenging times that require informed and

progressive solutions. A new financial environment and data system,

ecosystem, or data biome has been created with the convergence of market

5. George A. Walker, UK Financial Services Reform, in

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INANCIAL

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ERVICES

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3, 18

(George A. Walker & Robert Purves, eds., 3d ed. 2013); George A. Walker, Financial Markets

and Exchanges, in

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ARKETS AND

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XCHANGES

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3, 5 (Michael Blair, George

Walker, & Stuart Willey, eds., 2d ed. 2012).

6. See discussion infra Section III.

7. George A. Walker, BigTech, Stabletech, and LibraCoin: New Dawn, New Challenges, New

Solutions’, 53

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(forthcoming 2020).

8. See discussion infra Section IV.

9. Id.

10. Global Financial Innovation Network (GFIN),

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ONDUCT

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UTH

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, (Aug. 21, 2020),

https://www.fca.org.uk/firms/innovation/global-financial-innovation-network [https://

perma.cc/6TEK-WHBW].

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2021] REGULATORY TECHNOLOGY 3

and social change and regulatory reform and with technological advance and

new technological threats. This has come together with a significant

confluence of factors and forces. More traditional approaches to financial

regulation and legacy instruments have become increasingly inefficient and

ineffective. It is against this background that a new regulatory policy and

control model or agenda has to be constructed.

A number of general principles or approaches can be identified to attempt

to ensure that regulation can contain technology-specific exposures while

allowing markets to enjoy continuous innovation and development more

generally.

11

This can be understood in terms of some of the key lessons and

regulatory innovations adopted in response to the global financial crisis.

These can specifically be considered to include improvements in enhanced

financial regulation,

12

financial supervision,

13

financial resolution,

14

financial

market support,

15

and macro-prudential oversight.

16

Regulation must

become increasingly interactive or live and data sensitive with DataTech and

DataReg becoming an increasingly important component within this. New

forms of RegTech and RiskTech can then be designed, which are adaptive,

collaborative, interactive, resilient, and emergent. Firm systems (FirmTech)

and compliance (CompTech) can also be improved to be more reflexive,

responsive, modular, sustainable, and supportive.

The purpose of this paper is to outline some of the principal changes that

have occurred in financial market conditions and possible future demands

and requirements. The future of finance is considered in terms of the

principal trends and challenges that arise. The potential impact in the

11. William D. Eggers et al., The Future of Regulation: Principles for Regulating Emerging

Technologies,

D

ELOITTE

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NSIGHTS

, 11–18 (2018), https://www2.deloitte.com/

content/dam/insights/us/articles/4538_Future-of-regulation/DI_Future-of-regulation.pdf

[https://perma.cc/G9NW-FWTB] (arguing that a series of new regulatory principles has to be

adopted in response to emerging technologies based on adaptation, regulatory sandboxes,

outcomes, risk weighted (rather than one-size-fits-all), and collaborative regulation); see

discussion infra Section V (explaining the design of a new regulatory approach and

methodology).

12. Regulation is a control concept and refers to the imposition of specific obligations on firms

to manage risk and prevent collapse.

G

EORGE

A. W

ALKER

, I

NTERNATIONAL

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ANKING

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EGULATION

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, P

OLICY AND

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RACTICE

, 1 n. 1 (2001).

13. Supervision is a review or oversight function which either refers to monitoring the stability

of markets more generally or compliance with specific regulations imposed. Id.

14. Resolution is concerned with crisis management and the recovery or closure of a specific

financial institution. George A. Walker, Financial Crisis: U.K. Policy and Regulatory Response, 44

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751, 776 (2010).

15. Support refers to the provision of funding or other assistance to institutions in markets to

prevent individual or wider collapse. This specifically includes traditional forms of Lender of

Last Resort (LLR). George A. Walker, Conglomerate Law and International Financial Market

Supervision, 17

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287, 289–91, 327, 328 (1998).

16. Macro-prudential oversight is concerned with the monitoring of a financial system or

economy as a whole to detect any possible source of risk or instability, in particular, that is not

covered by micro-prudential supervision within a particular sector. George A. Walker, U.K.

Regulatory Revision: A New Blueprint for Reform, 46

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, 787, 788 (2012).

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW