Ideally, government regulations would take into account all relevant factors. In actual practice, compliance costs severely limit the information available to regulators. It can also be difficult to enforce regulations, and governments often rely on self-reporting. RegTech potentially solves these problems for banks, asset managers, and regulators by applying the latest financial technology to regulations.
RegTech is playing an increasingly important role in banking. 63% of bank executives expected their RegTech budget to increase over the next two to three years according to a survey by Moody’s Analytics. There is also substantial demand for using RegTech data outside of the compliance framework. Moody’s found that 73% of bank executives surveyed anticipated using RegTech solutions for other strategic objectives. Another major theme was compatibility, with 72% preferring software that integrates well to best stand-alone performance. The preference for integration likely comes from the increasing need for outside tech support in banking. 78% of Moody’s survey participants indicated that they are seeking personnel with different skills than current employees. Given the relative scarcity of many technology-related skills, most banks would be better served by partnering with FinTechs to meet their RegTech needs.
While more regulations have traditionally been applied to banks and brokerages, recent regulations for hedge funds and other asset managers open new opportunities for RegTech. For example, Europe’s MiFID II rules for financial instruments came into effect in 2018. IHS Markit & Expand estimated that the preparation costs for MiFID II were nearly 2 billion euros in 2017. MiFID II regulations contain many explicit restrictions and quantifiable limits, which makes them particularly good candidates for RegTech automation. While RegTech can reduce compliance costs, that is only the beginning. The new information made available under MiFID II can also be used to make better-informed trading decisions. Some large funds may be able to handle all of this data internally, but smaller asset managers must look for FinTech partners to remain competitive.
RegTech gives governments a powerful tool for increasing the quality of regulations and dramatically improving the lives of their citizens. Higher quality regulations can boost GDP growth by more than 2% a year according to a World Bank study by Djankov, McLiesh, and Ramalho. Governments can use FinTech to speed the transmission of information, automate processes, and reduce internal costs just as easily as private sector companies. The eventual widespread use of blockchain technology smart contracts would also allow for automatic compliance with regulations and tax collection. For example, the sale of a stock could be instantly reported to regulators on the blockchain and the appropriate capital gains taxes could be automatically deducted by the government. Automatic taxation would eliminate tax preparation costs and make tax evasion much more difficult.
RegTech is the ultimate win-win proposition. Businesses dramatically lower the risk of non-compliance and associated fines even as they reduce their compliance costs. Regulators are able to obtain the higher quality information that they need to make better decisions without burdening businesses. We can now solve many of the problems of regulation in the information age and begin building a more prosperous future together with RegTech.
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