Technology is not only having a profound effect on financial institutions and their customers, but is also putting the squeeze on financial regulators.
Greater quantities of data, both structured and unstructured, are being generated and analyzed to make financial decisions, a Celent report notes. Regulations themselves are also adding to the production of larger quantities of data.
Furthermore, the rapid rise of the financial technology—fintech—sector has not only disrupted the financial sector, but will disrupt financial regulation as well. The impact on regulators in particular will be driven by:
- A changing marketplace of financial institutions as new companies emerge.
- New business models (such as P2P lending and crowdfunding).
- Rapid change driven by new technology coupled with growth in data and analytics.
- The creation of “financial hybrids” as traditional financial firms and nontraditional financial firms begin to merge.
“Regulators, incumbent financial institutions, and emerging fintech companies will increasingly leverage technology to move towards real-time financial regulation in a data-rich and analytical manner. There will be shorter and more productive feedback loops between regulators and financial institutions, with a greater level of review of existing regulations to ensure that they remain relevant and effective,” says John Dwyer, senior analyst at Celent and author of the report.
Current financial regulation is characterized by an alphabet soup of regulators which can overlap and create different interpretations of the same rule. Innovation and automation of regulation should, over time, create the circumstances for significant streamlining and equip the regulatory bodies that remain to keep pace with the evolution of the technology-led financial industry far more efficiently.
Regulation has been in a state of major change since the global financial crisis. The shift towards a risk-based approach is driving regulators to ever more granular data requirements across every aspect of a financial institution’s business. Numerous deadlines challenge institutions because they have insufficient time to manage each deadline.
The key ingredient in a strategic response will be the appropriate use of technology. Currently within finance there is a shift towards technology-driven innovation, and incumbent financial institutions that fail to adapt to this environment will continue to struggle with regulatory demands and timetables.
Ultimately, the future of regulation of finance will be increasingly automated, leveraging:
- Active and productive two-way regulatory dialogue and regular feedback loops.
- Standardized presentation of data (regional/global).
- Automation of data collection.
- Open source compliance systems (encouraging fintech participation).
- Compliance criteria built into protocols (removing human error).
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