Regtech is the use of technology to ensure compliance with regulation. So says the new RegTech working group at Innovate Finance, whose mission it is to look at the main issues in the sector to help to promote London's regulatory IT profile.

Husayn Kassai, the CEO and co-Founder of Onfido, convened the first meeting of the group recently. It was the first of a series of sessions in which the group hopes to identify the main topics and issues that 'techies' and compliance people ought to be tackling when planning the future of the London RegTech scene. Collaboration and education are the watchwords of the group, which aims to become a forum for best practice and to help others understand the regtech landscape. It sees itself "as a single point of access to promote enabling policy and regulation, talent development, and business opportunity and investment capital." London is the world's regtech (and, indeed, fintech) capital at the moment, with hardly a day going by without some new development. One piece of recent news is that Corlytics (which scans regulators' enforcement notices) is collaborating with the Financial Conduct Authority to create a so-called intelligent handbook. The FCA rulebook or 'handbook' previously lacked built-in search capability by theme but has now been restructured and is searchable by teams, business line, activity and theme, so its existing material can now be tagged and read by machines. Corlytics has added front-end artificial intelligence by using a metadata structure. It is therefore now easier for users to scan the rulebook with vague search criteria and they can now search for rules from many directions.

Members can be involved in:

• enterprise connections;
• curated events for institutions;
• private round-table discussions;
• IT 'sandboxes' for member-firms;
• CXO and CMO fora;
• an annual conference;
• US 'east coast programmes,' whatever they may be; and
• ways of promoting women in FinTech.

Kassai is also looking forward to the new working group helping him set up some kind of standard by which the whole industry can shape and evaluate its regtech software. As the writing of software is a creative process, it is hard to imagine a way in which a set of programming rules might do this or indeed be of anyhelp at all. Kassai is on firmer ground, however, in his assertion that "as RegTech continues to grow apace, it’s increasingly technology that’s leading developments in regulation – not the other way around."  Founded in 2014 with the support of the City of London and the Canary Wharf Group, Innovate Finance is a not-for-profit organisation with 250+ members. Its lofty aim is "to create a single point of access across the sectors to help foster enabling policies, regulation, talent development, business growth opportunities and investment in the UK — and, most importantly, to create a global finance sector that offers services that are more sustainable, more inclusive and better for everyone."

The disjointed US approach

The London-based group is therefore keen to promote regtech in far-flung countries. Last summer it issued a paper on the US regtech scene, which is at a less developed stage the UK's, in tandem with the law firm of Hogan Lovell's. It conducted a brief survey of 'programmes,' an American term of art that regulators use indiscriminately to describe plans of action or efforts of some kind. At the time of the report's appearence in June, federal regulators such as the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the Commodity Futures Trading Commission had all announced that they were evolving 'programmes' to encourage FinTech companies to enter the US market. The Federal Reserve was, at the same time, trying to modernise the nation’s payment systems. The Securities and Exchange Commission and the Federal Deposit Insurance Corporation were taking an interest in FinTech, but had no formal programmes. The National Credit Union Administration was contenting itself with some minor rule-changes. The US approach to the promotion of regtech was therefore a disjointed one, and remains so to this day.

The 50 states, meanwhile, have been much more 'fin-technically' active. The growth of the FinTech industry has led to an increase in licensed entities and therefore has added to the funds that regulators can levy on firms. The states are meant to be laboratories in the United States and the broad arena of FinTech is no exception. Since the credit crunch of 2008, the FDIC has been reluctant to insure new depository institutions (it has only approved five new bank applications since then) and new FinTech companies want to avoid business with insured depository institutions because everything they do is regulated much more heavily than ever before. This has left the field open to states’ licensing schemes for the provision of non-bank financial services. In fact, the state banking regulators have signalled their unwillingness to share this space by recently taking the OCC to court, alleging that it has gone ultra vires by proposing to issue a 'FinTech charter.'

One aim, three approaches

The authorities in varous countries are promoting regtech by three broad means. These are: (i) the 'ecosystem' approach; (ii) the Digital Financial Infrastructure (DFI) approach; and (iii) the Rule and Process Change approach.

The 'ecosystem' approach refers to the fintech-related expertise and infrastructure that forward-thinking regulators build up at their own offices. Here they conduct 'hackathons,' proofs of concept, 'techsprints,' accelerators and other events, while externally striking up relationships with FinTechs and academics. The Monetary Authority of Singapore is a prime example of this, trying to build "an ecosystem where people can connect and collaborate." Within its own four walls it has formed a new ‘FinTech and Innovation Group’ that works with the financial industry and FinTechs to help foster innovation; it has embarked on the Financial Sector Technology &  Innovation (“FSTI”) Scheme, with S$225 million promised over the next five years for investments, grants and rebates to help support a vibrant FinTech ecosystem; and, together with the National Research Foundation, it has set up a FinTech Office to provide a single 'point of access' for all FinTech matters. It has also opened an innovation lab called Looking Glass @MAS, one of whose aims is a consolidation of 'know your customer' (KYC) information.

The UK has also taken this approach. The Bank of England’s FinTech Accelerator helps the UK's prudential regulator to work in tandem with firms, having created a community of FinTech-related organisations which, as previously mentioned, include Innovate Finance itself. It has 'proven concepts' by completing a Real-Time Gross Settlemen Payments pilot scheme with Ripple and by usinng MindBridge's ‘AI auditor’ to reform some regulatory data.

The DFI approach focuses on the digitisation of the reports that firms are required to send to regulators. Governments, regulators and technologists are taking this approach as they strive to modernise core infrastructure or processes, from access to payment systems to shared utilities that perform regulatory tasks. The UK's Payment Systems Regulator - the world’s first regulator dedicated solely to payment systems - has taken this approach in establishing the Payments Strategy Forum, which seeks to develop collaborative ways of improving payment systems and which has already evolved a strategy for the fundamental re-design of the UK’s payments infrastructure.

Austria is also 're-imagining' regulation with the help of DFI. Oesterreichische Nationalbank (its central bank), together with its banking community, has created a software platform - using proprietary technology from BearingPoint - in an effort to institute a new regulatory reporting model. The initiative is based on the greater integration of data at banks and seeks to bridge the IT systems of the regulator and the banking industry. This new “informational value chain” is housed at a separate entity (a shared service company) called Austrian Reporting Services GmbH.

Innovations require changes in regulatory rules and processes; this is the nub of the third approach. In the UK, the FCA issued a RegTech consultative paper in November 2015 and noted that it could persuade firms to adopt RegTech by 'defining' new regulations in a machine-readable format and establishing an international regulatory taxonomy.