RegTech and Digital Finance Supervision: A Leap into the Future
In recent years, the global buzz around financial technology (FinTech) has reached the halls of government authorities pursuing financial inclusion through digital finance. An array of cutting-edge technologies for regulatory compliance (RegTech) and for improving supervisory processes (SupTech) promises to relieve the costs of compliance and the pain of exercising supervisory control. These technologies are already supporting authorities in countries such as Austria. But what about emerging markets and developing economies (EMDEs), where the capacity of supervisors is often limited? Are authorities in these countries ready for the latest technologies?
Photo: Mahfuzul Hasan Bhuiyan, 2015 CGAP Photo Contest
While these authorities’ lack of IT infrastructure, technical expertise and financial resources could be viewed as barriers to the adoption of the latest technologies, we see their absence as an opportunity to leapfrog the incremental steps taken by authorities in more developed economies. After all, legacy information systems, deeply ingrained supervisory practices and complex regulatory frameworks can become barriers if they make it difficult for authorities to imagine and do things differently. That is not to say that EMDEs don’t face significant challenges in adopting RegTech and SupTech, but the challenges are worth addressing.
RegTech and SupTech are fundamental to improving the quality of the data that supervisory agencies use on an ongoing basis to make risk assessments and make crucial supervisory, regulatory and policy decisions. Moreover, they can improve the quality of data that financial services providers report without necessarily imposing additional burdens on the providers. As argued in our previous blog post, new data collection approaches could reduce providers’ regulatory reporting costs over time.
To succeed in harnessing technological innovations, authorities’ first step should be to reassess their data collection mechanisms to fix existing problems in how providers gather and report data. This is because data are central for financial supervision. The most commonly used regulatory data collection mechanisms are based on traditional report templates in Excel, XML or another format. As we discuss in a recent CGAP working paper, these templates have many shortcomings that make reporting burdensome for providers and negatively impact the quality of the data used by supervisors. RegTech and SupTech make it possible to reduce or eliminate the practice of providers filling out and supervisors receiving regulatory report templates. Authorities should move toward automated data collection processes that minimize or eliminate manual procedures on both the sending and receiving ends, by adopting new approaches such as the “input approach” and the “pull approach.”
Under the input approach, providers automatically upload sets of prepackaged, standardized data to a database owned or accessed by the supervisory authority. Austria has taken this approach. Under the pull approach, the supervisory authority extracts (or pulls) data from financial services providers’ IT systems, either at will or at predetermined dates. Rwanda has adopted this approach. Both approaches have pros and cons that vary according to country context, but they are undoubtedly superior to manual data reporting and collection processes. The input approach in Austria has the advantage of almost eliminating the use of report templates.
There are areas beyond data collection, such as some risk analyses and reporting tasks, in which SupTech could benefit EMDEs. As explained in a speech by Dr. David Hardoon, chief data officer at the Monetary Authority of Singapore, the central idea behind new applications of technology is to substitute costly and time-consuming manual procedures for automated computer-based ones. Technology can save precious supervisory time that can be better used in tasks that require human judgement. Labor-intensive tasks that could be partially or entirely automated include:
Validating reported data and managing data submission
Checking compliance with certain regulatory requirements like capital adequacy and transaction thresholds
Searching for and analyzing documents that are publicly available on the internet
Managing onsite inspections and filling out inspection reports
Crunching data and producing charts and tables on individual providers or on entire regulated sectors
Another potential application of SupTech is creating “smart regulations” that financial institutions’ computers can read and execute – that is, automatically adapting an institution’s rules (embedded in its management information systems) according to the latest regulatory changes. This possibility is explored in a Toronto Centre note and European Banking Institute working paper.
Innovation in financial services is fundamental to advancing financial inclusion and other policy objectives. Just as financial inclusion is fueled by technology, so should be supervision. The opportunities brought by SupTech are seemingly endless, and there is no shortage of IT and consulting firms promising the best solutions. Authorities in EMDEs should consider their options carefully and keep in mind that automation does not replace the need for stronger analytical and auditing skills among supervisors. These skills are essential to get the most out of the high-quality data that could be generated by new technologies.
CGAP Publication: Data Collection by Supervisors of Digital Financial Services