Compliance Matters recently interviewed Tom Pfister, the global head of product strategy at Confluence, about the direction that regulatory technology has taken in the past and will take in the months to come.

This article is presented in the form of a question-and-answer session, exactly as it happened. We began by asking Pfister to set the scene by recounting the recent history of ‘regtech.’

Pfister: In the old days, the idea was to provide HNW investors with the information they needed to make good decisions. The assumption was that people who invested in alternative assets were sophisticated enough to know what they were doing.

After the industry crisis began in 2008, and with the advent of new technology that was not available before, regulators began taking a more monitoring approach. Their attitude now is that investors can never be sophisticated enough and that products are too opaque or too 'siloed.' Even family offices – though they occupy the very sophisticated end of the HNW retail market – are likely to find it too expensive to pull the necessary information together to make informed choices and in any case they are limited in the type of information they can get.

Compliance Matters: What other things have fuelled the regtech revolution?

Pfister: Imagine a fixed-income fund that has a run on redemption. The regulators used to hire business experts to deal with this; now they hire data experts. The regulators also want to see how liquid your fixed-income data is and (to satisfy their 'systemic risk' mandate) how volatile it is. There has been a massive uptick in the amount of work to do and a tidal wave of disclosure.

It makes it easier for you to package your products if you are concentrating on the things that the generic world of regulators wants. The magnitude of the data is what created the 'regtech' movement.

Compliance Matters: Yes but the definitions of ‘regtech’ and ‘fintech’ seem to be so indistinct that many firms are claiming to be regtech or fintech firms by simply doing the things they’ve always done and using the word to gain a certain cachet. Firms that use XBRL, for example.

Pfister: Criticism is warranted, and not just for firms with XBRL. Look at the Long Island Ice Tea Company – they changed their name to Long Blockchain in December and their shares rose by 289%. There are many other recently re-christened companies that make consumer goods whose share prices have rocketed after they adopted fintech-like names.

XBRL (eXtensible Business Reporting Language) sits on the verge of what a human can look at and what a computer can look at. It is very difficult for a computer to look at it. There are a vast number of interpretative layers. The next stage will come when the regulator says "here is the query I want you to run." The UK’s Financial Conduct Authority is in the vanguard of this development. It wants to say "I should be able to give you a query and your systems should be able to interpret that and give me that answer I want." That's the future – everybody contributing to the same set of information.

Regtech is an industry movement to satisfy the broad range of regulations. It shifts compliance off the 'deliverable' part of the process that creates all the data points. Nobody is there yet, but soon auto-notification – intelligent notification – will identify activities and tell the compliance officer about new activities.

We're trying to shift data away from human-readable. The old way is analogous to an alarm clock, whose hands you have to adjust when you move between time zones. If, however, the software is connected into these changes and can spot a change of time zone, it will benefit your funds.

Compliance Matters: What is this new word, ‘datatech’?

Pfister: DataTech is the evolution of that into other areas, not just regulation. Its aim is to identify the risks that the regulators will identify before they actually do it. DataTech ought to be able to work out how best to distribute the funds, package the automation, and even train investors. The ultimate aim is the emergence of a robo-fund. At the moment, though, fund operations, fund administrators and back offices are still not hit.