What does the future have in-store for regtech?
Wai Lum joined the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) in June 2015 and heads up the Capital Markets division responsible for authorisation and supervision of financial market infrastructures and capital markets intermediaries. Wai Lum also spearheads FSRA’s strategy and efforts to support the supervision of innovation in Financial Technology (FinTech) and development of the FinTech ecosystem in ADGM. Here, we discuss the future of regtech.
Globally, the pace and complexity of regulatory change continues to present a major challenge and opportunity cost for financial institutions. As we push towards an increasingly digitized future where high speed and volume of transactions are made possible through technology, the demands of regulatory compliance and risk management on the business will only increase further. Regtech offers huge potential for real solutions to the ever increasing demands of compliance within the financial industry.
At the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM), promoting and fostering the development and adoption of regtech forms an important part of our wider objective to encourage best practices and raise industry standards. Crucially, we see regtech becoming the commonplace digital interface between regulators and the regulated. As a relatively young financial centre, we have a tremendous opportunity to rethink how we supervise financial markets, and prepare ourselves for the role of a digitally-native regulator.
We support RegTech in three fundamental ways:
1. Putting in place progressive regulations and regimes that would support innovation in, and the adoption of, RegTech.
We created a sandbox environment (known as the Regulatory Laboratory or RegLab in short) for promising fintech and regtech solutions to be developed and tested under the guidance and supervision of the regulator. Not just a platform for regtech startups to innovate, the RegLab is also a platform for us regulators to learn how best to adapt and re-invent our regulatory requirements through experimentation.
To this end, we must be prepared for regulations to be modified or discarded when considering novel technology that results in better risk management or regulatory outcomes.
2. Investing in the right tools and technology as regulators, to supervise technology adoption by the industry.
Traditional regulatory functions (for example those relating to anti-money laundering, protecting client assets or identifying market manipulation) will be much more agile, proactive and data driven, with the utilization of regtech solutions, including those which are powered by AI and DLT. In order to encourage industry to move towards such tools, it is important for us to build our own in-house supervisory and technical capabilities on these fronts, and also have the latest in Supervisory Technology or SupTech tools to monitor the markets and firms we supervise.
3. Investing in the right talent and expertise to stay on top of the regtech disruption and landscape.
It could very well be that in the not-too-distant future, regulators will start to resemble tech companies, with our own in-house tech teams of developers, coders and other experts able to drill down into and vet the technology stacks underlying the various fintech innovations that emerge. These in-house technical competencies will also allow regulators to develop our very own tech-enabled regulatory innovations to help make regulation in financial services more effective and efficient.
At ADGM, as a regulatory “startup”, we have an amazing opportunity to build in the technology capabilities from the very beginning. We invest quite a fair amount of resources on projects involving regtech/suptech. In all our tech-driven projects, we always ensure that front-line supervision and authorisation officers invest their time looking at fintech/regtech and other emerging technology trends. Indeed, central to this strategy is the ADGM RegLab.
ADGM launched the RegLab because we saw a huge gap in the financial services market – there was no way for innovative technology such as regtech and fintech to engage with regulators. The RegLab was not only a big step for us, but for the MENA region, as no other government agency or regulator had explored fintech at that time – we were the first.
The ADGM RegLab has taught us a lot about not just startups, but also how to ensure that financial institutions can use transformative technologies such as blockchain and artificial intelligence safely.
To date, the ADGM RegLab is the most active regulatory sandbox in the region. It has received 83 applications over 4 cohorts, and 32 fintech/regtech firms have been accepted into the programme.
In 2019, we saw another big gap in the market that no one had addressed: there is no digital basis on which regtechs and fintechs can interact with financial institutions and regulators. ADGM strives to be the world’s leading digital regulator for next generation digital markets, and we believe that is only possible by providing digital capabilities that encourage a new model of collaboration.
ADGM Digital Lab is one such capability, as it is a cloud-based API-enabled platform that hosts a suite of tools that enable regtech, and fintech to collaborate with regulators and financial institutions. A version 2.0 of our RegLab, we see the Digital Lab as a necessary evolution as financial markets need to digitalise analogue sandboxes, accelerators and innovation programmes. We will therefore be migrating our RegLab activities to the ADGM Digital Lab.
Regulatory challenges are experienced globally, whether by a global financial institution with a presence in ADGM or a fintech seeking to expand into MENA, with ADGM as its regional headquarters. Given the cross-border nature of financial services, there will be a much greater need for cross-border cooperation and knowledge sharing between jurisdictions. We therefore see collaboration with other regulators as crucial.
ADGM is one of the founding members of GFIN, the Global Financial Innovation Network, a regulators’ group to foster cross-border innovation and trials in financial services. This forum is an incredibly useful platform to share knowledge, and connect regtech and fintech solutions across jurisdictions. Leveraging the Digital Lab, we believe we can foster an effective model of partnership between regulators (e.g. a co-sandboxing regime).
Subject to regulatory developments in other jurisdictions, we are currently exploring the possibility of a project around coding regulations in digital securities to enhance cross-border compliance in securities markets with other regulators.
Monitoring for and mitigating financial crime is one of the most important functions of a regulator. As malicious actors in financial markets become more technology savvy, so too must regulators. ADGM sees RegTech as a powerful ally in the fight against financial crime. A good example of this are regtech tools that we can deploy to monitor for money laundering or market abuse in fiat, securities and crypto asset markets.