The Totally different Flavors of RegTech and SupTech: How Firms and Regulators Use Expertise to Enhance Regulatory Compliance and Monitoring
When the calendar turned to 2020, my first thought was how futuristic the year sounded and what interesting things it had in store. At the time, nobody could have imagined that some of those interesting things would be face masks, work from home, and wear the same loungewear so many times that you start to lose a concept of time. Still, the COVID-19 pandemic has exacerbated the point that technology affects almost every facet of our everyday lives. Consider something as good as a lamp: you can buy it from Amazon, turn it on or off through Google, and pay for the electricity that powers it through the app. Given this, and the current state of the world in which we live, it should come as no surprise that modern technology is even having an impact on the financial services industry and the regulatory environment in which they operate. Through RegTech and SupTech, both industry and regulators are finding ways to modernize compliance and create a more efficient and increasingly digital regulatory landscape.
What are RegTech and SupTech?
“RegTech” refers to a technology developed for industry to address regulatory challenges. These challenges can include meeting compliance requirements, assessing risk management, and reporting on data. SupTech, on the other hand, describes the use of technology by supervisory and regulatory authorities to improve the efficiency of their tasks in industry. SupTech includes the streamlining of administrative and operational processes as well as the use of automation in the monitoring process. Ultimately, the combination of RegTech and SupTech will ideally result in a more robust compliance environment through proactive oversight from regulators, improved reporting from industry, and better overall oversight. An added benefit of this efficiency is lower compliance costs for the industry and better allocation of resources by regulators. A real win-win situation.
Developments in RegTech
RegTech is a booming industry that is expected to be valued at over $ 55 billion by 2025. With this growth comes some inevitable questions. How do the regulators see RegTech? Do RegTech programs have the blessings of the agencies they seek to match? State and federal regulators recognize the impact RegTech has on the industry and actively seek to keep up with the innovations they see.
In July 2019, NYDFS Superintendent Linda Lacewell announced the establishment of the NYDFS Research and Innovation Division. The division’s intent is to ensure that NYDFS keeps pace with innovation across all sectors of the financial services industry. NYDFS demonstrated its commitment to promoting and tracking innovation by joining the Global Financial Innovation Network (GFIN) in October. GFIN aims to support financial innovation by providing companies with more efficient ways to interact with regulators to develop new products that will benefit consumers.
In a speech in August 2019, Federal Deposit Insurance Corporation (FDIC) Chairwoman Jelena McWilliams emphasized the growing role of RegTech and stated that the FDIC must intervene if regulators fail to adhere to common guidelines for the use of artificial intelligence Banks agree. Banks could potentially use AI to comply with anti-money laundering laws and regulations and other important compliance programs. As McWilliams noted, small banks are more likely to turn to technology for competitive advantage and need to be confident that their attempts to innovate are not hampered by regulatory uncertainties.
Developments in SupTech
Despite the increased emphasis on tracking industry innovation, regulators don’t just sit back and watch the industry use technology. In fact, groups of agencies have come together to study SupTech initiatives that will enable them to make better use of the technology in monitoring and communicating with industry.
The conference of state banking supervisory authorities (CSBS) Vision 2020 started back in 2017 to modernize state regulation of non-bank financial companies. Vision 2020 focused on six main initiatives: (1) Creation of the Fintech Industry Advisory Board, which enables the industry to contribute to government regulation; (2) Redesign of the Nationwide Multistate Licensing System & Registry (NMLS) with a more automated and data-driven approach; (3) Harmonization of multi-state oversight through uniform audits and uniform best practices; (4) Assisting state banking departments in the detection of vulnerabilities for higher performance; (5) Enable banks to service non-banks by addressing the risks involved and demonstrating how to comply with state and federal laws; and (6) improve third party oversight by supporting federal legislation amending the Banking Services Enterprises Act to allow state and federal regulators to better coordinate oversight.
In January 2020, CSBS published its Vision 2020 Accountability Report. The report, produced by the Fintech Industry Advisory Panel, outlines progress on the group’s initiatives to streamline government licensing and oversight of fintech companies. The report focuses on the increased use of technology for licenses and exams. Specifically, CSBS has: (1) expanded the use of NMLS for all license types for non-bank financial services, (2) developed state licensing guidelines that are consistent across states, and (3) introduced a new state examination system. The report also identified a more uniform and streamlined approach to licensing and regulation of monetary services companies nationwide.
As part of the Vision 2020 initiative, CSBS announced the nationwide introduction of the State Examination System (SES) in February 2020. SES is designed to enable government agencies to securely conduct investigations, investigations, consumer complaint handling and enforcement actions. The customer complaint management system, which was only released last September, enables state financial regulators to enter, manage and process customer complaints electronically. Summaries of all complaints submitted are available to all government regulators using SES so that government regulators can identify trends and potential bad actors. While SES is clearly a SupTech solution, it also contains some RegTech elements. The goal of SES is to bring every interaction a company has with government regulators to a single platform. If companies get a digital platform from a single source for all regulatory interactions, this would result in enormous time and cost efficiency.
Feels a little like the future doesn’t it?