Realising RegTech – a new system for economic health
Corporate law has expanded significantly recently, with laws covering misconduct, as well as “traditional” white collar crimes, such as tax evasion, fraud and money laundering, write Ross Buckley and Deborah Young.
The Australian Securities and Investments Commission (ASIC) is embracing a “why not litigate?” mantra and – via the “fairness” provision of the Corporations Act (formalised in March) – it can now level penalties of up to $525 million on companies and $1.05 million on individuals.
Off the back of Australia’s royal commission, up to 501 matters have been initiated in the Federal Courts, plus Treasury is spending $10 million for 40 pieces of legislation in the next 12 months.
The rise in governance is a global phenomenon. From the GFC in 2008-15, developed markets alone saw a 492 per cent increase in regulatory changes, with a particular focus on compliance with anti-money laundering and consumer protection rules.
The pace of change and the penalties for non-compliance are high. At a global level, in 2017, an average of 216 new regulations were introduced per day. And in 2018, financial institutions were charged more than $100 billion for failures of regulatory compliance.
In Australia, spurred on by the royal commission, banks are adopting regulatory technologies, or RegTech, to automatically monitor and respond to evolving regulation.
As well as supporting compliance, RegTech enables banks to be more flexible and customer-centric – by providing capabilities from digital identity validation and monitoring of financial promotions to risk management.
Keeping in step with corporates, regulators are also beginning to explore artificial intelligence and machine learning to interrogate regulatory returns and identify risks and anomalies. For example, at a recent forum, ASIC shared the results of a natural language processing (NLP) technology trial to listen to insurance sales calls to screen for inappropriate language.
This enables ASIC to routinely analyse thousands of calls, instead of human listeners painstakingly listening to hundreds of calls.
Better brakes, faster car
Going beyond its role in helping corporates and regulators to comply and enforce regulation, the real promise of RegTech is to establish macro-economic stability, by making regulatory supervision a function carried out in close to real-time.
Furthermore, RegTech can accelerate commerce. The digital checks and balances RegTech can bring are like fitting high-performance brakes on a racing car.
Counterintuitively, the brakes are vital to the driver’s ability to go fast – without them, we would all drive so slowly. Similarly, when it comes to observing regulation, RegTech can provide the confidence the system needs for commerce to move fast and to rapidly adapt to disruption.
Conversely, a key cause of Australia’s economic slowdown is the tightening of standards for bank lending. RegTech can assist banks in real time to offer compliant services, including lending.
RegTech: the key to macro-level financial stability
In 2014, chief economist of the world’s oldest bank, the Bank of England, Andy Haldane, articulated a futuristic, but realistic vision for a financial system akin to the bridge of the Starship Enterprise.
Haldane’s dream “...involve(s) tracking the global flow of funds in close to real time (from a Star Trek chair using a bank of monitors), in much the same way as happens with global weather systems and global internet traffic. Its centrepiece would be a global map of financial flows, charting spillovers and correlations.”
RegTech holds the potential to provide the macro-level supervision and stability that Haldane envisioned through monitoring the systemic effects of markets and market participant behaviours – providing a picture of health and emerging risks, so that irregularities can be spotted and acted upon early.
The Senate has also identified the potential for technology to improve financial resilience – having established a committee to inquire and report on RegTech opportunities, barriers, and future trends by October 2020.
Australia has the third-highest concentration of homegrown RegTech globally, behind the US and UK. These markets display the major opportunity to lead a new paradigm of regulatory governance.
A recent global benchmark report showed that 118 RegTech vendors earned annual revenues of nearly US$5 billion, showing the opportunity. However, 60 per cent of those vendors were established between 2014-18 and 82 per cent had their first round of funding during this time.
There is likely to be a major shakeup among global RegTech start-ups in the next 12 months, as the need for new capital and customers arises urgently.
RegTech is the next inevitable evolution of regulation. It’s time that top decision-makers across regulated sectors seized this opportunity – as a means to jump start the economy and to rebuild trust in our institutions.
The next two years will be crucial in determining which markets generate the RegTech solutions that will inevitably underpin global financial services going forward.
Ross Buckley is a Scientia Professor at the UNSW and Deborah Young is the CEO of The RegTech Association (Australia).