Will changes in tech drive changes in regulations?

They say that necessity is the mother of invention. The financial services sector is a perfect illustration of this in action. Historic scandals and modern regulatory scrutiny have created a new drive for transparency in an industry desperate to regain trust amongst its customers. This is an international trend. Markets like the UK are still feeling ripples from the 2008 financial crisis, whilst in Australia the impact of the Royal Commission into banking is still in full swing. The demand to improve performance, culture and customer outcomes is higher than ever. With legacy compliance systems typically overly reliant on manual processes, this has fuelled a wave of technological innovations geared at changing the status quo amidst an industry-wide consensus that throwing more bodies at the problems won’t make them go away. In the space of just a few years, RegTech has grown from a niche offshoot of FinTech to something that could dwarf the FinTech space.

Early adoption

We are already seeing a growing number of firms turning to new technological solutions to supplement their existing capabilities. The majority of these firms are arguably the innovators and the organisations most determined to embrace fresh thinking to get ahead of the curve. With RegTech solutions enabling compliance teams to adjust their cost-to-income ratio, savvier firms are beginning to realise that improving compliance is not purely about dealing with regulatory requirements: it now has the potential to deliver value to other areas of the business and more importantly, end customers. At this point in time though, it is the first movers who are taking advantage of the new capabilities RegTech has on offer, with other firms either unaware of the scope of these new innovations or watching from the sidelines as they become more mainstream.

Regulator interest

It isn’t just regulated organisations that are playing close attention though: regulators are also eager to become a central part of the RegTech revolution. RegTech has the potential to reduce the costs of compliance, speed up processes and improve customer outcomes exponentially. The UK’s FCA has gained international plaudits for its forward thinking approach to technology, hosting multiple TechSprints, regulatory sandboxes and working closely with RegTech providers to nurture solutions which will have a positive impact in the market. With other national regulators taking note, regulators such as ASIC in Australia are also working closely with the RegTech community. There is a growing rallying call from regulators that as new tools become available, they will increasingly be asking organisations why they aren’t using them.

Shifting benchmarks

It stands to reason that firms should go to all reasonable lengths to support their customers. As new tools start increasing the span of what can practically be achieved, it also stands to reason that the regulations themselves will also start to shift in line with these new capabilities. For example, in the case of Recordsure, we’re using AI to enable firms to review 100% of their customer conversations to boost customer care, compliance and risk management. Traditionally, this is a manual process that can only cover 5% of the landscape forcing firms to randomly sample and meaning the vast majority of customers are not adequately safeguarded. With solutions like this which can exponentially improve customer outcomes, benchmarks and regulatory expectations are almost inevitably going to shift.

Time for change

Two common blockers to the adoption of new technologies are a lack of general awareness on the art of the possible and caution that the promised solution turns out to be a false dawn. As early adopters demonstrate the benefits of these solutions in the field then the arguments against using them become weakened. Meanwhile, legislation such as SM&CR could set a precedent that decision makers are expected to proactively research technological capabilities. As new RegTech solutions become staple in the market, it seems likely that regulations will gear up to keep pace. Whilst use of AI and related technologies is predominantly limited to those keen to take advantage of the benefits of operational efficiencies, increased output and improved customer outcomes, adoption will naturally spread over time, and in all likelihood gradually become mandatory from a regulatory standpoint. We will reach the stage where using key RegTech tools becomes expectation rather than innovation.