Over two years ago, my coauthor Matt Homer and I shared in “Regtech is for Regulators Too” that just as Regtech companies and financial institutions were innovating, financial regulators were too. Last month, our article was published in The RegTech Book, a collection of industry-leading articles on the subject. How has the article held up? Remarkably well. Much of what we foretold holds even more true today.
The case for RegTech solutions is even stronger
As compared to a few years ago, regulators face even more digitized financial marketplaces. The World Bank Findex indicates that 515 million adults have gained access to bank or mobile money accounts since 2014. Overall, this has been beneficial for consumers, as more people have gained access and now use digital payments, micro-loans, and savings accounts.
However, several markets are showing signs of stress. In Tanzania, officials are concerned by a potential credit-bubble sparked by a rapid increase in the availability of digital credit. A similar situation is brewing in Brazil.
In such instances, regulators may be blind to emerging risks with access to partial, incomplete, or outdated information. RegTech solutions can help regulators see and act with confidence by digitizing the collection of supervisory data, the review of consumer complaints, and the analysis of marketplace data. Coupled with strong decision-making processes, these solutions help regulators identify and resolve emerging risks that threaten consumers or the safety and soundness of the financial system.
Though the increased availability of digital finance generally portends well for countries and consumers, it also requires regulators to be more vigilant. Taking a more data- and technology-driven approach to oversight through the use of RegTech solutions is one such way.
Regulators are actively innovating
The popularization of regulatory sandboxes indicates a strong hunger by regulators to engage with industry. As the name conjures, regulatory sandboxes provide a mechanism for fintechs and banks to experiment with new financial products, business models, or technologies, in a contained way with consumers. Typically, regulators learn a great deal through these engagements that often inform changes to the larger regulatory framework.
At last count, CGAP estimates there are over 50 sandboxes globally, depending on the definition used — up from just 1 at the beginning of 2016.
Beyond regulatory sandboxes, we have seen movement by regulators to be more open — in the form of establishing innovation offices, hosting ‘office hours’ and other forums where regulators and providers can interact, and forming bilateral relationships between regulators to share best practices.
Barriers to RegTech innovation have become stronger, harder
However, the last few years have also highlighted the limitations preventing universal adoption of RegTech solutions by regulators: principally politics and limited resources.
As the U.S. demonstrates, changes in presidential administrations have consequences. Previously, we held the U.S. Consumer Financial Protection Bureau (CFPB) as a model of how regulators are leveraging technology to fulfill its mandate.
Though still a leader, the CFPB has since curtailed its collection of data through the supervisory and enforcement processes. The precipitous drop in CFPB enforcement activity can be, in part, attributed to a lack of collected data that hinders the agency’s understanding of the marketplace. This extends to its rulemaking agenda as well — the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 requires the Bureau to perform rulemaking and it still has not nor does it seem to have the data to do so.
In addition to political headwinds, many regulators also face greater demands on their limited resources. For example, as regulatory sandboxes have exploded in popularity, less understood has been their cost. A recent CGAP report indicated the management of a sandbox may exceed $1M and can come at the cost of undertaking other beneficial initiatives, like RegTech solutions.
In many countries, like Myanmar, that have created a sandbox or are considering one, regulators still review individual consumer complaints manually, taking limited staff away from the business of regulatory oversight.
What’s next two years from now
Two years from now, it is my hope that we continue to celebrate the continued progress by regulators to innovate and be users of RegTech themselves. To be sure, RegTech isn’t a silver bullet; but, combined with smart decision-making, it can much better position regulators for the challenges and opportunities that lie ahead.
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