We must not let regulation crush innovation

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As the regulatory burden on banks and other financial services firms increases, it is unsurprising that we are seeing innovative technological solutions to help address such demand.

The industry response is two-fold: we are seeing fintech and “regtech” startups develop solutions to specific regulatory demands. These offerings are being picked up by the banks as part of their own regulatory stack, or the banks are investing in the startups themselves.

In parallel, many financial services firms are trialling technology themselves in a sandbox environment. Where such technology fails a test of suitability, the innovation lab environment allows that to happen quickly, without impacting production.

Responses by banks to regulation to date have been predominantly reactive – constantly having to change their existing platforms and applications to meet ever-changing regulatory demands.

While it is no doubt difficult to adapt to the sheer volume of regulation from various domestic and international regulators and bodies, the current situation must change.

Fintech and regtech strategies will lead the way in helping financial services firms manage multiple regulatory demands. We might also see a next generation of front office applications which provide regulatory compliance as part of their default offering, particularly in areas of trade or transaction reporting, risk and conduct, or capital management.

As banks and fintech startups start to become comfortable with emerging technologies, such as AI or cloud-based services, regtech solutions are becoming increasingly innovative, using technology that would have been off limits to the bigger banks before.

Innovation can lead the way to finding better solutions to regulatory challenges, as long as the emerging technologies do not create a more complicated web of additional regulations stemming from the technology itself.

The individuals and companies offering these solutions may fall under regulation and standards of conduct already, but what could be more challenging is if regulators turn their gaze to the technology itself.

We have seen this recently with the Financial Conduct Authority’s queries into distributed ledger technology (DLT), where, despite controls being in place, discussions have been opened about the suitability of that technology to meet specific regulatory demands.

Yet at the same time, regulators are also offering regulatory sandboxes for fintech innovation.

So there is a fine balance to be found between understanding the potential for new technologies, and proper governance around them.

If regulators do decide to pursue regulation of the regtech sector itself, the process of financial services firms exploring innovative solutions may become more difficult.

The financial services industry needs to promote both innovation and governance, in a technically savvy, efficient and controlled way; an approach that understands the business context, benefits and limits of the technology, and embeds human accountability.

By taking a holistic approach to regtech solutions, digital strategy and compliance, businesses can create a model that will stand up to regulatory scrutiny while promoting efficiency.

Conversely, the regulators will need to give space and freedom for banks and technology companies to innovate, while at the same time follow the developments in new technologies to understand how they fall under existing regulatory regimes.