Filling in the blanks: Supporting RegTech innovation with data

Shield - Filling in the blanks Blog image

Since the launch of the UK Financial Conduct Authority’s regulatory sandbox in 2016, several other global regulators have followed suit in a bid to address some of the key issues around regulatory technology. And with the influx of new regulations continuing unabated, the need for innovative solutions to the challenges facing financial institutions has also never been more pressing. Yet while this need is widely recognised by not just the rising ‘RegTech’ sector but also by regulators and the capital markets firms, the rate of adoption continues to lag some way behind expectations. So why is there such a disconnect and what can be done to bridge the gap?

Reliable endorsement

At Shield FC, we believe the problem lies with the lack of real-world data available for RegTech’s to model and test their assumptions, which in turn is vital in order to prove the viability of the solution to capital market firms. While most institutions now recognise the value in collaborating with RegTech companies, the reality remains that it is easier for them to justify working with a major, established technology firm rather than a smaller vendor or start-up. This has resulted in a continued reliance on legacy technologies even when there are better, more agile solutions available.

The need to overcome this key challenge is also noted by the FCA, which states that one of the main objectives behind its regulatory sandbox is “enabling products to be tested and introduced to market” by allowing firms to assess their commercial viability, as well as the actual technology. In February, it reported some success to date with at least 40% of participating firms having received investment during, or following their sandbox test. These start-ups have benefited not only from being able to test their assumptions under controlled conditions but also from having done so in close collaboration with the national regulator – which in itself provides additional reassurance to the institutions they are seeking to work with.

Developing the ecosystem

However, there is currently no formal provision of standardized data within the sandbox environment for use by the participating RegTech firms. Yet for RegTech startups, such data is essential to be able to verify the proof of concept and justify the technology spend. Making anonymised data available to RegTechs would be a practical, and effective, step forward in encouraging greater levels of innovation in the industry as a whole.

As a result of recent regulatory changes, most notably the introduction of MiFID II, regulators such as the FCA already have large amounts of standardised data which could be supplied to RegTech firms to effectively test their business models.

In fact, even historical investigations conducted by regulators, assuming anonymisation, could be used by start-ups to better analyse past cases.

Institutions also have a recognised need to foster and support innovation and can no longer merely pay lip service to support this goal. Both the financial industry and the regulators can achieve this by adopting a more collaborative approach and providing RegTechs in the sandbox environment with the data they need. This, in turn, will help to prove the viability of these new technologies and pave the way for greater adoption of such solutions at the institutional level.