RegTech as a Response to Regulatory Expansion in the Financial Sector

Abstract

In the aftermath of the financial crisis, the financial sector was hit by a tidal wave of new legislation. How financial institutions can remain compliant with this ever expanding financial legal framework, has been a pressing question since. This contribution explores the potential of RegTech solutions to ensure abidance with the law.

RegTech can be defined as the use of technological solutions to facilitate compliance with and monitoring of regulatory requirements. In recent legal doctrine, RegTech is almost unequivocally hailed as holding the promise of substantial gains in terms of increased efficiency and reduced risk of human errors and resulting administrative fines. Underexposed in legal doctrine and regulatory reports on this topic are, however, the risks and challenges of RegTech solutions.

This contribution highlights those risks and challenges, including new sources of systemic risk, elevated costs, data protection concerns and problematic side-effects of “dehumanization”. As RegTech nevertheless seems to be one of the very few answers to the compliance challenge, several strategies to remedy or contain each of these challenges are presented.

Finally, this contribution underlines the crucial role of the financial supervisor as an intermediary between legislator and financial institutions in a RegTech era. RegTech indeed accelerates the evolution towards a cooperative supervisory model, in which the supervisor guides financial institutions in their search for adequate and correct compliance and in which financial institutions in turn deliver essential input to supervisors for the development of efficient guidelines, best practices and RegTech solutions.

Keywords: RegTech, financial regulation, financial supervision, compliance, information technology

JEL Classification: K22