RegTech (the application of new technologies to deliver new solutions for regulatory activities) is now well and truly a thing. It has its own conferences, its own growing list of celebrated RegTech entrepreneurs and is even acknowledged and supported by the regulators. Many of the big banks and insurers are already trialling, prototyping and using new RegTech solutions. Fantastic. Surely the future is bright and shiny for RegTech?
Probably, but we’re not yet fully convinced. We’re actually a little worried that RegTech is currently more froth than substance – where FinTech took over a decade plus to establish itself, RegTech has surged to prominence in just two years. Our worry is that RegTech is a thing that everyone so desperately wants to work that people naturally want to talk it up. And we can see why – the promise of reducing the cost and complexity associated with compliance activities is very attractive. However, from our perspective, RegTech just doesn’t yet seem to be a real transformative force and is just not yet in the class of its cousin FinTech. And, because everyone wants it to be successful it gets way more stage time and “air play” than it actually merits. RegTech is currently to FinTech what Solange Knowles is to her sister Beyoncé – good but not Beyoncé.
Now, it’s not that RegTech does’t have value, it absolutely does. However, what the best of FinTech has delivered is an actual transformation of the day to day experience of the Financial Services customer whereas RegTech currently seems to be predominantly focussed on the more effective and efficient delivery of B-2-B activities such as market and trade monitoring and reporting. Whilst this is a very good and welcome thing it’s not going to transform the customer experience and we can’t get very excited about it yet. It’s what we used to call the IT Transformation of market transaction activities by niche businesses using cloud technologies and clever algorithms. Obviously RegTech is a more snappy title but it’s essentially the same thing.
However, looking beyond the current hype we think that there are real opportunities for RegTech. Real opportunities to transform the customer experience of financial services users through the application of new technologies in the regulatory environment. The trick will be to start where the best of FinTech started and focus on the customer and their experience and look to transform that by the smart application of technology to the compliance and risk aspects of Financial Services. Now we have no idea what the entire outcome will look like but as an example of customer focussed RegTech we can imagine a customer who is choosing their banking services based on a transparent view of their potential provider’s regulatory record. We also have other customer focussed RegTech ideas up our corporate sleeves but unfortunately we can’t quite share them with you yet
Now that kind of customer focussed RegTech really excites us. If we can develop those types of solutions we’ll be delighted and happilly wave the RegTech banner – but to do it, the focus of the RegTech entrepreneurs would have to shift away from purely reengineering the classic transactions of the investment banks and trading houses and switch back to transforming the customer experience and the conduct of financial services staff. What would be really frustrating is if the current hype surrounding RegTech dissipates and the funds required to support future RegTech developments dry up just at the moment the new wave of RegTech entrepreneurs really hit their stride and start to generate some truly exciting and transformative breakthroughs.
Another erroneous concept that seems to be pumping up the RegTech hype is the idea that somehow RegTech will magically make senior managers immune from possible enforcement actions that may be contemplated by regulators in response to a firm’s failings. Now, whilst RegTech may reduce the risk of human error and improve the ability of a firm to spot potential issues it does not have the power to shield a Senior Manger from real and meaningful scrutiny by an FCA that is very focussed on upholding the principle of personal accountability.
In fact for the regulators to continue to stay supportive of RegTech it will have to address how it can support greater accountability and how that will work in practice. If collective responsibility has previously been an impediment to the FCA being able to prosecute individuals, we can’t see the regulators allowing RegTech to create shiny black boxes which will make it harder to enforce individual accountability.
In our view RegTech is not the way to easy compliance. Yes, we think it should aim at more effective, efficient or cheaper compliance but we would worry if that gets mixed up with thinking that it’s a way of firms abdicating responsibilities or having those hard conversations that every firm needs to have.
The future of RegTech could be great but let’s dampen down the hype and focus on transforming things for the customer and promoting accountability. After all customers are who the regulations are designed to protect, and when things go wrong, accountability is the first thing we all look for.