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Financial regulations 30 Aug 2017

What is 'regtech' for?

'Regtech' is a buzzword in the banking world.  'Reg' stands for regulation and 'tech' for technology.  So, it is easy to imagine what the purpose of regtech is:  developing technologies that help banks comply with regulation in a more agile and efficient way.

Much has already been written about the use of digital tools to create new products and services in banking.  However, there is less talk of another crucial use of technology in the financial sector:  Its application in improving regulatory compliance, addressing risks related to financial stability and integrity, and consumer data protection.  It is the so-called 'regtech'.

Technological progress is helping both the industry and authorities address the  - traditional and new - risks compromising financial stability, consumer protection, and the integrity of the financial system in a better way.  'Regtech' solutions enhance risk management functions and enable a more efficient and effective compliance with regulatory requirements.  How?  Through the automation of manual processes and the increase in quantity and quality of data, and their automated analysis.  This allows, for example, to generate homogeneous reports between institutions for regulators, which can also be used internally to improve business decision making.

From a consumer protection perspective, the application of new technologies implies new security risks.  The most obvious one comes from the broader access to personal customer data, which need to be adequately protected. Some of these risks arise from automated tools, but also offer a great advantage:  they enable to increase control and traceability over the relationship with the customer.

Another risk threatens the integrity of the financial system:  The anonymity of virtual currencies and the increased speed of payments.  However, new 'regtech' solutions allow monitoring and analyzing transactions more quickly and effectively.

In a recent article published in Estabilidad Financiera magazine, published by the Bank of Spain, José Manuel González-Páramo explains these points. In the article, titled 'Financial innovation in the digital age: Challenges for regulation and supervision’, BBVA's executive director analyzes the potential benefits of the digitazation of finance.  He also explains the risks posed by digital infrastructures, new distribution models and digital solutions for consumers.  Finally, he outlines what the response of regulators and supervisors to these challenges should be.

José Manuel González-Páramo recalls that this new digital paradigm presents new risks in terms of cyber security, consumer protection, operational continuity and fraud, among others, and these new risks are fully not covered by the traditional approach to supervision and regulation.  Therefore, he believes that there is a need for a renewed regulatory framework that fully captures the potential of digital innovation and makes the financial system more resilient against future crises.  In his view, this response must be built on at least four pillars:

  • Well-defined policies on the control and management of new technological risksin the financial sector
  • The launch of innovation hubs
  • The creation of supervised and safe pre-market testing environments (known as sandboxes)
  • And the development of new digital capabilities and a collaborative mindset within oversight and regulatory agencies.