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We argue that the transformative nature of technology will only be captured by a new approach at the nexus of data, digital identity, and regulation

FinTech, RegTech and the Reconceptualization of Financial Regulation

NORTHWESTERN JOURNAL OF INTERNATIONAL LAW & BUSINESS, no. 3 (2017): 371-413

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Abstract

Regulatory change and technological developments following the 2008 Global Financial Crisis are changing the nature of financial markets, services, and institutions. At the juncture of these phenomena lies regulatory technology or "RegTech"-the use of technology, particularly information technology, in the context of regulatory monitoring...More

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Introduction
  • Capital requirements have been a major focus of cross-border regulatory cooperation since the 1980s, when the original Basel the author Capitals Accord was developed in response to insufficient levels of capital in internationally active financial institutions after the 1980s Developing Country Debt Crisis.[99] While initially fairly simple, throughout the 1990s Basel the author was subject to a series of amendments which steadily increased its complexity and related compliance costs.[100] Of these, the amendments to extend the framework from credit risk to market risk and to recognize netting in derivatives contracts were probably the most significant, with the former’s use of internal models forming an important element of Basel II.
Highlights
  • Regulatory and technological developments are changing the nature of financial markets, services, and institutions in ways completely unexpected prior to the 2008 Global Financial Crisis (GFC), which we have addressed in previous work.2 “FinTech” refers to the use of technology to deliver financial solutions and is one aspect of these fundamental changes
  • We argue that RegTech developments are at present incremental, but that we are moving towards a paradigm shift that will necessitate a reconceptualization of financial regulation
  • Unlike the UK’s Financial Conduct Authority (FCA), we argue that RegTech cannot be simplified as a category of FinTech
  • Capital requirements have been a major focus of cross-border regulatory cooperation since the 1980s, when the original Basel Capital Accord (Basel I) Capital Accord was developed in response to insufficient levels of capital in internationally active financial institutions after the 1980s Developing Country Debt Crisis.[99]
  • The amendments to extend the framework from credit risk to market risk and to recognize netting in derivatives contracts were probably the most significant, with the former’s use of internal models forming an important element of Basel II
Results
  • Following the GFC, attention has focused on the development of Basel III, designed to dramatically increase capital, reduce leverage, enhance liquidity, and implement systems of crisis management for individual institutions, including by limiting reliance on firms’ own internal risk modeling systems.[103] This is a massive framework in its internationally agreed soft law form, and it will be even more substantial when implemented in the legal and regulatory systems of
  • Unlike the situation pre-crisis, regulators no longer rely on the internal risk management systems of individual financial institutions to produce appropriate levels of capital for economic, regulatory and accounting purposes, but instead have established complex rules to set capital, leverage, and liquidity at levels sufficient to protect financial stability, all backed up with periodic reviews and “stress tests.”[106] These changes have increased the demand for RegTech solutions for the financial industry.
  • AML and KYC requirements established by the FATF and the Basel Committee and implemented by domestic regulators around the world have been a driving force in the demand for RegTech solutions, in particular for technology to simplify and automate processes across the firm and to ensure compliance with applicable rules around the world, including suspicious transaction identification and reporting.[108] An increasing range of IT firms, advisory firms, and start-ups are involved, with clear opportunities for future development.
Conclusion
  • In the context of the extensive reporting requirements of prudential regulators around the world, resulting from postcrisis reforms, financial institutions look to centralized operations to gather the necessary data globally on a real-time basis so that, in the first instance, the institution and its management has a much clearer picture of operations and risks, and in the second instance, so that the information can be repackaged as necessary to meet the requirements of regulators around the world.[114] Ironically, these operations look a great deal like pre-2008 trading floors, with rows of desks with telephones and multiple screens to allow continuous monitoring and communication across the institution.
Funding
  • The authors gratefully acknowledge the financial support of the Hong Kong Research Grants Council Theme-based Research Scheme (Enhancing Hong Kong’s Future as a Leading International Financial Centre) and the Australian Research Council Linkage Grant Scheme (Regulating a Revolution: A New Regulatory Model for Digital Finance); the substantial input of Dr Cheng-Yun Tsang, and the research assistance of Jessica Chapman
Study subjects and analysis
risk and compliance consultants: 600
The recent deal by which IBM is to acquire Promontory Financial Group heralds the way forward. The synergies in the deal come from the 600 risk and compliance consultants within Promontory teaching Watson, IBM’s huge artificial intelligence system, how to apply AI to risk management and compliance obligations.6. 4 INST

staff: 9000
9/18/17 1:12 PM. In 2014, Goldman Sachs broke ground on a new campus in Bangalore (Bengaluru), India, with capacity for 9,000 staff.112. Bangalore is already Goldman’s second largest office (with approximately 6,000 staff, compared to 12,000 in New York)

staff: 6000
In 2014, Goldman Sachs broke ground on a new campus in Bangalore (Bengaluru), India, with capacity for 9,000 staff.112. Bangalore is already Goldman’s second largest office (with approximately 6,000 staff, compared to 12,000 in New York). Other major financial institutions, including JP Morgan, Citibank, Morgan Stanley, Barclays, Deutsche Bank, HSBC, and Standard Chartered, among others, have large proportions of their staff in centralized support operations in India, especially in Bangalore, Mumbai, New Delhi, and Chennai

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  • 138 Andrew Meola, China Just Hinted It Could Increase Fintech Regulation, BUSINESS INSIDER (June 29, 2016), http://www.businessinsider.com/china-just-hinted-it-could-increase-fintech-regulation-20166/?r=AU&IR=T.139 The G-20 in its recently approved High-Level Principles for Digital Financial Inclusion also calls for the promotion of an “Enabling and Proportionate Legal and Regulatory Framework” that “ensure[s] that similar risks are regulated in a similar manner and that an appropriate risk-based approach to supervision is developed.” GLOB. P’SHIP FOR FIN. INCLUSION, G20 HIGH-LEVEL PRINCIPLES FOR DIGITAL FINANCIAL INCLUSION (2016).
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  • 140 See also U.S. FIN. CRISIS INQUIRY COMM’N, THE FINANCIAL CRISIS INQUIRY REPORT - FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES (2011).
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  • 146 This includes: test durations, key milestones, risk analysis, investigation of potential exposure, measurement metrics and exit strategy. For more details, refer to Andrew Moyle & Fiona Maclean, WorldFirst Regulatory Sandbox Open for Play in the UK, LATHAM & WATKINS 1 (May 2016), https://www.lw.com/thoughtLeadership/LW-world-first-regulatory-sandbox-open-for-play-in-UK.147 There is even a current discussion on developing an EU-wide regulatory sandbox. See William Shaw, EU Weighs Cross-Border Financial Regulatory Sandbox, LAW360 (Sept.16, 2016), http://www.law360.com/articles/840834/eu-weighs-cross-border-financial-regulatory-sandbox.
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  • 149 The G-20 High-Level Principles for Digital Financial Inclusion also encourage worldwide regulators to “[c]ollaborate with industry to explore the potential of distributed ledger technology [blockchain] to improve the transparency, efficiency, security, and reach of wholesale and retail financial infrastructure, allowing for appropriate risk mitigation and safeguards.” GPFI, G20 HIGH-LEVEL PRINCIPLES FOR DIGITAL FINANCIAL INCLUSION (2016).
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  • 150 Goldman Sachs recently reported that the cash equities market could save US$6 billion if blockchain technology were used. See Blockchain Tech Could Save Cash Equities Market $6bn a Year – Goldman Sachs, FINEXTRA (May 26, 2016), https://www.finextra.com/newsarticle/28955/blockchaintech-could-save-cash-equities-market-6bn-a-year—-goldman-sachs.
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  • 151 See James Eyers, ASX Builds Blockchain for Australian Equities, SYDNEY MORNING HERALD (Jan. 22, 2016), http://www.smh.com.au/business/banking-and-finance/asx-builds-blockchain-for-australianequities-20160121-gmbic0.html; Michael del Castillo, Nasdaq Opens Blockchain Services to Global Exchange Partners, COINDESK (May 26, 2016), http://www.coindesk.com/nasdaqs-blockchain-servicesglobal-exchange/.
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  • 152 See Blockchain Technology Will Profoundly Change the Derivatives Industry, BITCOIN MAGAZINE (May 27, 2016), https://bitcoinmagazine.com/articles/blockchain-technology-will-profoundly-changethe-derivatives-industry-1464368431.
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  • 153 Abhijit Bose, India’s Fintech Revolution is Primed to Put Banks out of Business, TECHCRUNCH (June 14, 2016), https://techcrunch.com/2016/06/14/indias-fintech-revolution-is-primed-to-put-banksout-of-business/. To learn more about India Stack, visit its official website at http://www.indiastack.org/ About-India-Stack.
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  • 163 See Media Release, Monetary Authority of Singapore, MAS Proposes a ‘Regulatory Sandbox’ for FinTech Experiments (June 2016), http://www.mas.gov.sg/News-and-Publications/Media-Releases/2016/MAS-Proposes-a-Regulatory-Sandbox-for-FinTech-Experiments.aspx.
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  • 164 See Press Release, FINMA, FINMA Reduces Obstacles to FinTech (Mar. 17, 2016), https://www.finma.ch/en/news/2016/03/20160317-mm-fintech/.
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  • 165 See Hong Kong Regulator to Launch Fintech ‘Sandbox’, THOMSON REUTERS (Sept. 5, 2016), http://www.reuters.com/article/hongkong-banks-regulator-idUSH9N18001M.
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  • 166 See Forming a Fintech Family, BANGKOK POST, (Sept. 14, 2016), http://www.bangkokpost.com/business/news/1085544/forming-a-fintech-family.
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  • 167 See Press Release, Abu Dhabi Global Market, Abu Dhabi Global Market Sets Out Proposal for Fintech Regulatory Framework in the UAE, Abu Dhabi Global Market (May 10, 2016).
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  • 170 The first cohort can apply to enter the sandbox between May 9, 2016 and July 8, 2016, and the second cohort is due to start in January 2017.
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  • 179 Project Innovate and Innovation Hub, UK FINANCIAL CONDUCT AUTHORITY (May 11, 2015), https://www.fca.org.uk/firms/project-innovate-innovation-hub.
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  • 180 Lingling Wei, China to Begin Deposit Insurance in May, WALL ST. J. (Mar. 31, 2015), http://www.wsj.com/articles/china-to-begin-deposit-insurance-from-may-1427794649.
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  • 181 See, e.g., WEF, A BLUEPRINT FOR DIGITAL IDENTITY - THE ROLE OF FINANCIAL INSTITUTIONS IN BUILDING DIGITAL IDENTITY (Aug. 2016).
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Janos Nathan Barberis
Janos Nathan Barberis
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