How RegTech can help regulation challenges

Increasing levels of regulation, combined with a greater focus on data and reporting standards, are now spearheading the development of RegTech - the use of technology to address regulatory challenges. Leading experts assess the trends, challenges, and opportunities in this exciting subsector, which has become an important area of focus for the Luxembourg financial centre.

Source : Leo May 2016
Publication date : 06/28/2016

Trends

The main difference between traditional solutions and RegTech is the ability to make more effective use of the data available, with the latter tending to be cloud-based and speedier, cheaper and more secure. Dan Morgan, is Head of Policy and Regulation at Innovate Finance, an independent, British, non-profit membership based organisation and industry body serving the FinTech community.

“RegTech is a fascinating subsector of FinTech. When I started at Innovate Finance, there were only a very small number of players who identified as RegTech. Now close to 30% of member companies self-identify as RegTech businesses, which could broadly be defined as data analytics and behavioural economics, using data to map accurately and report in more efficient mechanisms”.

Morgan points out that blockchain will play an increasingly important role in regulation, which has the potential to improve accountability and KYC and AML processes.

“In 2016 FinTech investment is starting to shift from business to consumer propositions and focusing on the opportunities provided by regulatory infrastructure”, he adds. “The growing interest from institutions and corporate ventures in blockchain are explained by the way standards are agreed and the potential to reform the regulatory infrastructure.”

Another area of development in Europe according to Dan Morgan is Robo-advice. “The European banking authority has already considered reviewing the regulatory framework in light of non-face-to-face financial services, and how to encourage a more widespread adoption. The Robo-advisory market has tremendous potential and is predicted to grow from 20 to 450 billion USD under management globally by 2020. We are just at the very beginning.”

By 2018, PSD II (the revised EU Directive on Payment Services) will also drive the development of a growing number of players involved in the payments and aggregation space.

“The Payment Services Directive II and open bank API in the UK are unprecedented opportunities for the development of third-party FinTech services. These businesses will enable users to access their accounts, initiate payments while aggregating payment information. PSD II is going to revolutionise the payments market. People will start using numerous different apps and layers in addition to their wholesale bank account”, Morgan concludes.

Luxembourg’s international role

Luxembourg’s expertise in financially regulated  entities places it in an exceptional position to become a European leader in RegTech. “Thanks to the skills and experience accumulated over the years in Luxembourg’s financial sector and by the big Four, RegTech is certainly an area where Luxembourg has the critical mass to play an international role”, explains Gaël Denis, Partner at EY Luxembourg.
 
“Given Luxembourg’s leading position in bond issuance and investment funds, the volume of KYC´s performed annually is particularly high. As the industry seems to be moving towards distributed consensus ledgers around KYCs, Luxembourg will then be able to leverage on its positions as it has the skills to automate the KYC process and understand the specifics of AML”.

In a fast-changing regulatory environment, compliance officers need to adapt faster than ever before to ensure processes are thorough, particularly regarding transparency requirements. RegTech solutions will help management teams perform ‘health checks’, closely monitor what is happening in their business, have an even more granular approach to reporting and get real-time information on compliance issues. RegTech also offers legislation gap analysis tools, management information tools, transaction reporting tools, regulatory reporting tools, training tools, case management tools, and more.

“15-20 years ago compliance was there, but it was not as critical as today. Today, top management and board of directors need to be up-to-date at any time on what’s going on in the company”, adds Denis.

The regulator

Also for the CSSF, the Luxembourg regulator, RegTech solutions, once efficiently established, could facilitate supervisory tasks since data gathering, reporting and information exchange could be managed more efficiently. However, RegTech solutions will only be accepted if they are fully compliant with legal requirements, particularly in the fields of data privacy and data protection rules, know-your-customer regulations and IT security requirements.

Any financial services provider establishing itself in Luxembourg must be authorised by the Minister of Finance and will be subject to the prudential supervision of the CSSF. The same rules apply to financial technologies and new digital services. Far from preventing innovation, this supports the development of a level playing field for all financial professionals and provides security for customers and investors.

The CSSF has always considered innovation as an essential driver of development for the financial sector. “Luxembourg’s regulatory approach has contributed to develop an important payment services industry which generates nowadays an ecosystem of highly innovative products”, says Nadia Manzari, Head of Innovation, Payments, Markets Infrastructures and Governance, at the CSSF.

The CSSF was one of the first regulators in Europe to adopt a clear position with regards to virtual currencies, including defining virtual currencies as money since it was accepted as a means of payment for goods and services by a sufficiently large group of individuals. This position has recently been confirmed by a decision of the European Court of Justice.

“In the same spirit of innovation the CSSF has published an FAQ explaining under which conditions video identification is accepted”, she adds.

Smart and agile

Over the past months and in close synergy with the Luxembourg Ministry of Economy and the Luxembourg Ministry of Finance, the Luxembourg Institute of Science and Technology (LIST) has ramped up a new corporate research and innovation programme in Smart Finance.

The LIST Smart Finance programme has two key development thrusts, business analytics and RegTech.

The first research thrust relates to the role of business analytics for turning raw data into new added-value services such as those associated with decision making and recommendations in different areas (banks, funds, insurances).

“In this field, LIST already works with worldclass institutions and I am pleased to say that, only in the past week, LIST has signed a major research collaboration agreement with Asia’s top university, the National University of Singapore (NUS) to research jointly and develop Business Analytics solutions for global financial institutions and other clients. The project is supported by the Luxembourg “Fondation National de la Recherche” (FNR),” says Gabriel Crean, CEO at LIST.

The second component of the program is related to financial regulation (FinTech and RegTech). This reflects the outcome of LIST discussions with key Luxembourg FinTech stakeholders, which identified the issue of a “smart and agile Luxembourg regulation environment”, as the key challenge that Luxembourg must now address to provide the competitive innovation edge to best position Luxembourg as the most reliable and innovation-friendly FinTech ecosystem in Europe.

“RegTech will be an additional asset for Luxembourg helping traditional entities and FinTech players evolve and adapt to the regulatory landscape while ensuring products and services are fair, reliable and consumer-friendly”, he adds.

The LIST RegTech initiative will support the research, development, and deployment of a reliable and flexible regulatory environment in Luxembourg, with real-time adjustments to new innovation risk.

In particular, LIST will coordinate the development of a smart digital “Regtech Luxembourg” platform. “This platform will integrate and support the appropriate reference models, data repositories and appropriate analytics for innovating regarding RegTech services.”

On one side, services will assist regulated entities in demonstrating their compliance with regulations with cost-effective tools and methods. On the other side, regulators will benefit from these services for developing and adapting their regulation in a reliable and agile way by making better exploitation
of the information reported by regulated entities and by accessing to the necessary knowledge about new FinTech risks.

“A real-time smart regulation landscape will provide Luxembourg with the competitive edge to be the most reliable and innovation-friendly FinTech ecosystem in Europe. Its deployment will drive growth, reinforce confidence in the financial landscape and develop even further the attractiveness of Luxembourg for new FinTech ventures and ICT related companies. Ultimately, our approach to regulation and Tech will facilitate the emergence of new business models”,
concludes Crean.

LR