While fintech has become a widely recognized term for technology innovation in the financial services space, the industry is still trying to pin down the exact meaning of regtech.
SEC Commissioner Michael Piwowar took on what he called the “ill-defined” term in a recent speech, stating that in part, regtech “covers the use of technology by regulators to fulfill their duties in a more thorough and efficient manner,” as is the case when the Securities and Exchange Commission’s Market Abuse Unit Analysis and Detection Center “deploys technological tools to detect insider trading and market manipulation activities.”
However, regtech, Piwowar added, “also refers to the use of technology by regulated entities to streamline their compliance efforts and reduce legal and regulatory costs.”
One example would be using blockchain technology and artificial intelligence tools to “allow the easy and secure transferal of critical regulatory data to multiple federal agencies,” he said.
“Most importantly,” Piwowar added, regtech “covers collaboration between private and public actors to take advantage of existing technologies to make everyone’s lives easier.”
Another regtech example, Piwowar noted is the SEC’s “critically important” Electronic Data Gathering, Analysis and Retrieval system, or EDGAR, which makes public company filings “truly accessible to the whole internet-wired world,” and “greatly enhanced and democratized the power” of the SEC’s disclosure-based regulatory system.
As he noted, the Commission is currently engaged in an EDGAR redesign program, “a multiyear cross-Commission initiative to develop and deliver a ‘next-generation’ electronic disclosure system.”
A Post-Financial Crisis Remedy
Aite Group stated in a recent report titled Regtech Reality Check: The Truth About Compliance Technology that the new industry buzzword combines the terms “regulation” and “technology” and reflects the industry demand for technology to “better arm” the compliance function in the wake of the financial crisis of 2008.
The industry, writes the report’s author Virginie O’Shea, has been “bombarded with compliance requirements over the last few years,” and understanding how each of the regulations correlates or conflicts with the others when put into an operational and practical context is an unwieldy task.”
With so many “moving parts to monitor,” O’Shea said, “compliance teams are often overwhelmed, and legal experts are in high demand.”
Firms, she argues, “must re-evaluate the resources they have at hand to meet the ongoing pipeline of requirements and move from a reactive approach to a more proactive and strategic stance.”
During the fourth quarter 2017, the report notes that Aite surveyed 120 financial institutions, with the majority hailing from the buy side (70% work for asset managers or hedge funds).
Less than a quarter of respondents use the term “regtech,” the report found,
While “regtech is increasing in usage and popularity in the media and within the venture capital and private equity realm, it has yet to be fully adopted into the industry lexicon across the capital markets,” O’Shea writes.
However, O’Shea added that “it’s telling that more than half (53%) of respondent firms are aware of the term even if they don’t use it.”
The report notes that from 2015 to 2017, “regtech” Google searches “increased significantly” and that Aite Group anticipates that, much like fintech, regtech’s “application will be debated by the industry over the next couple of years until it is absorbed into the day-to-day reality of capital markets firms and the term becomes part of the industry lexicon.”