On 7th August 2018, the Financial Conduct Authority (FCA) has announced the creation of the Global Financial Innovation Network (GFIN). Based on the association of 12 financial regulators and organisations, the GFIN will be the place where innovation and regulation can meet on a global scale. The goal of this initiative is to create a cross-border sandbox where regulators and firms can interact and foster new technologies and business models in regulation.
Since the Global Financial Crisis, regulators and financial institutions are active transforming the financial system into a more secure and stable environment. The fast pace and the broad scope of the changes is a challenge for both. Regulators and financial institutions introduced more and more technology to meet the regulatory objectives while moderating the costs. This paved the way for RegTech.
In the beginning, Regtech was mostly focusing on how to automate regulatory reporting and compliance processes. It is now clear that it can deliver much more, from the optimization of regulatory capital for financial institutions to providing real time insights into the markets to the regulator. Solutions are rapidly developing to improve fraud prevention, KYC operations. Regtech is also expected to reduce compliance costs by streamlining the processes and deliver advanced risk and governance platforms.
New technologies used by Regtech firms include Distributed Ledger Technology, online platforms, APIs to offer a secure access to financial services to customer, biometrics, … Examples of new business models are the use of consumer information to help with savings habits or investment advice, insurance mediation, …
The rise of RegTech is not only caused by the financial crisis, it is also fostered by developments in data science and support from regulators, looking to improve their supervisory tools. Regtech firms need time and a specific environment to develop their products. Regulators acknowledged this by providing safe spaces, with adequate safeguards where firms can experiment new products or business models without exposing them to public or financial risks.
The regulator’s benefit is twofold : not only does it increase the speed to market of solutions that will ease the implementation of regulations, but it is also a cooperation and experience-sharing space that could prove useful for future policy work.
Regtech firms clearly take advantage of the sandboxes: 90% of the firms that completed testing in the first cohort of the FCA sandbox continued to market launch and 40% received investment during or following their sandbox tests1.
The current leading regulatory sandbox is FCA Innovate, launched by the FCA in 2016. During these two years, 89 regtech firms were able to test their product in the FCA sandbox. In Europe, Switzerland and Luxembourg set up local sandboxes, while 11 other countries have innovation hubs or similar approaches in place. A European sandbox would help local regtech projects to grow and reach the European market. The debate is open, and the Commission, in its Fintech Action Plan, calls for feedback and best practices from the ESAs and plans to present a report in Q1 2019.
The GFIN collaboration announced by the FCA includes worldwide regulators from UK, USA, France, Australia, Canada, Abu Dhabi, … The members will share experience of innovations in their respective markets, provide a forum for joint policy work, and provide firms with a cross-border sandbox. This project will hopefully help regtech firms to expand their services and business models across borders and operate in fluctuating and heterogeneous regulatory environments. On a longer term, this forum may also be the starting point a global regulatory convergence.
About the author
Thomas Dufresne hold a Master's Degree in Engineering - Computer Science (Ecole des Mines de Nantes, France) and worked for 5 years Paris in life insurance and asset management. Thomas moved to Brussels in 2008 and joined ING, where he worked for 8 years in risk management and financial markets before joining Initio in 2017. Since August 2018, Thomas is the leader of the business line Risk & Compliance.