RegTech has immense potential but barriers exist for all sides. In this article, we’ll look at some of the issues facing regulators.

In January the FCA issued a call for responses as it consulted on the future of regtech. The fact they have launched this consultation shows how much they understand the value of regtech to the future of the sector. The fact that they are looking for answers mean they still have some way to go before they have worked out how to approach it.

Regulating regtech

The regtech market is growing rapidly – both in size and complexity. Reports suggest it could be a $100bn opportunity, and that potential is attracting new participants. A new generation of agile start-ups are coming entering the market offering new solutions to address regulatory challenges. In doing so they create a market full of choice, but with most solutions addressing only single issues.

Understanding how these companies work and, more importantly, how to ensure they can operate effectively is one of the big challenges for regulators. That lack of understanding makes it difficult to take a stance on regtech.

In general, the FCA, like other regulators, has been supportive. They see regtech as a being way of facilitating compliance for businesses and regulators alike. It can move towards their goal of creating a regulatory environment which is anticipatory and proactive rather than regressive and reactive.

However, they lack the expertise within their organisations to adopt a clear stance. This leads to a conservative approach where they are content to stick with what they know rather than take a risk on something new and untested.

Partly as a result they are taking a passive approach to regulation and reacting to change rather than leading the conversation. They have not, as yet, articulated a firm position on regtech, the areas which should be covered and how it should be integrated into business operations.

Moving forward

The FCA’s consultation is a welcome development. It shows that regulators are keen to promote regtech and develop conversations about how to further promote its use. They need to understand the market, what’s available and the various risks and benefits it can bring.

At the same time they must adopt a collaborative approach. Multiple regulators around the world are undertaking their own initiatives towards regtech. They need to talk to one another, share information and collaborate on research initiatives. Only by doing so can they achieve a consistent global approach to the problem.
Most of all they need to be flexible and consult with both regtech providers and financial institutions themselves. It is by harnessing the combined experience and expertise of all these participants that they have the best chance of making meaningful progress.

RegTech remains a sector full of possibilities but also uncertainty. As things stand regulators have recognised the potential but remain uncertain what stance they should take in order to move on to the next stage.