RegTech: Are Supervisors Ready for the Data Revolution?

Technology and data are considered the engine of new financial disruption, with the financial tech (FinTech) industry leading the way. Yet FinTech also opens the door for a less well-known sibling: RegTech.

The term was first used and defined by the Financial Conduct Authority in the United Kingdom as a subset of FinTech. Per the definition, it "focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently or effectively than existing capabilities." In other words, it is technology that can improve efficiency, consistency, and ease of supervisory processes.

This could be automatization of existing procedures, such as authorization, market monitoring, offsite supervision, and collection of regulatory returns, many of which currently rely on paper documents, physical binders or Excel spreadsheets. The Central Bank of Brazil, for example, has developed a technology solution for what is called remote examination. Through a system called Siscom (Integrated System for Supervision Support and Communication), supervisors can collect data and documents remotely and interact online with financial institutions. It standardized supervisory tasks, automated bureaucratic functions (such as filing documents), and allowed supervisors to reach small financial institutions in a cost-effective way, increasing the productivity of supervision teams.

In another explanation of RegTech, four key characteristics were identified: agility in organizing data sets, speed in configuring and generating reports, integration to reduce timeframes to get solutions up and running, and big data analytics.  

RegTech opens further opportunities for supervisors to engage with new actors, such as consumers. For example, the Consumer Financial Protection Bureau in the United States sponsored an online complaint handling system that collects information directly from consumers and organizes it in a complex database available to the public. This includes consumers who can retrieve information about an individual financial institution, researchers and federal agencies responsible for regulation and oversight that can use the precious information to prioritize their work.

Using alternative databases can potentially expand or shift the focus of supervision. For example, in most jurisdictions, agents are considered an outsourced workforce of financial institutions, facilitating account opening, payments and applications for loans. The current approach among financial supervisors is to leave the monitoring of agent networks to financial institutions and audit their internal monitoring process, not only because of the high cost of supervising thousands of small agents but also the lack of information about them which would allow supervisors to plan their supervisory work. Can RegTech change this landscape? Theoretically, yes, as supervisors might access new information from different sources and examine agents remotely.

However, policy makers need to keep in mind that using alternative data and face-lifting petrified processes in financial supervisors is not just a matter of technology. To fully benefit from these new solutions, further changes are necessary:

• Organizational culture should change to better reflect the new regulatory and supervisory landscape, including new actors and information they generate.
• New skills, including data analytics and communication, will be required from supervisors managing the expectations of citizens and new parties.
• Regulation will need to change to allow supervisors (and financial institutions) to rely more on technology, while protecting consumers’ rights, particularly their privacy.

Are supervisors ready for their own data revolution? In this road to adapt to new technologies, supervisors will not only need to acquire skills and change culture and regulation, but also address new risks in their activity, such as data breaches, data loss and many others still unknown. This provocative question and other aspects of RegTech were addressed in a series of webinars focused on RegTech organized by Digital Frontiers Institute. See the Digital Frontiers Institute video on RegTech to learn more.

Editor's note: This post is also available in Mandarin on the World Bank Voices blog.