FinTech, RegTech and the Reconceptualization of Financial Regulation

The regulatory changes and technological developments following the 2008 Global Financial Crisis are fundamentally changing the nature of financial markets, services and institutions. At the juncture of these two phenomena lies regulatory technology or ‘RegTech' – the use of technology, particularly information technology, in the context of regulatory monitoring, reporting and compliance. For policymakers and regulators, the challenge of regulating rapidly transforming financial systems requires increasing the use of and reliance on RegTech. Whilst the principal regulatory objectives (e.g. financial stability, prudential safety and soundness, consumer protection and market integrity, and market competition and development) remain, their means of application are increasingly becoming inadequate. RegTech developments are leading towards a paradigm shift necessitating the reconceptualization of financial regulation. RegTech to date has been focused on the digitization of manual reporting and compliance processes, for example in the context of know-your-customer requirements. This offers tremendous cost savings to the financial services industry and regulators. However, the potential of RegTech is far greater – it has the potential to enable a close to real-time and proportionate regulatory regime that identifies and addresses risk while also facilitating far more efficient regulatory compliance.We argue that the transformative nature of technology will only be captured by a new approach that sits at the nexus between data, digital identity and regulation. We seek to expose the inadequacy and lack of ambition of simply digitizing analogue processes in a digital financial world. The development of financial technology (‘FinTech'), the rapid developments in emerging markets, and the recent pro-active stance of regulators in developing regulatory sandboxes, all represent a unique combination of events, which could facilitate the transition from one regulatory model to another. This paper sets the foundation for a practical understanding of RegTech and proposes sequenced reforms that could benefit regulators, industry and entrepreneurs alike in the financial sector and other industries